Itemized Deductions - Allowed vs. Allowable

A 1040 taxpayer may claim Standard Deduction or Itemized Deductions on their return. Generally, you claim the one that generates the greatest benefit for the client.

When claiming Itemized Deductions, must the taxpayer claim ALL ALLOWABLE deductions or may the taxpayer claim only some of the deductions. For instance, assume the taxpayer had state taxes withheld of $20,000. Does the taxpayer have to claim the full $20,000 or may the taxpayer claim a lesser amount -- say $15,000? Or if the TP has $10,000 of documented charitable donations, must he claim the full $10,000? Is there a different answer for the two types of deduction -- w/h vs. charitable?

It might be helpful to understand the scenario under which such a strategy might yield a tax benefit.

As long as no fraud is involved or the tax due is understated the taxpayer has a right to do something stupid.

I once had a person who was in the AMT say to me since I am in the AMT I didn't claim my state and local income taxes paid. He believed since under the AMT s state and local income are not deductible he was getting a tax benefit by not claiming the deduction.

The question is whether we're allowed to do it, not whether it will yield a tax benefit...

The other question is are you, as a paid preparer who has to sign the return, willing to prepare and file what you know to be an inaccurate and incomplete return?

Neither sec. 164 nor sec. 170 require a taxpayer to deduct “all” the eligible taxes or contributions paid during the year. In fact, sec. 170 states that a deduction shall be allowed for “any” charitable contribution made during the year.

I suppose that an argument could be made under sec. 162 with respect to business expenses because that section at least states that a deduction shall be allowed for “all” the ordinary and necessary business expenses paid or incurred during the year. But let's save that debate for another time.

So, I just don’t see how only deducting some of the eligible taxes or some of the contributions that the client paid during the year is preparing an “inaccurate and incomplete return.” As long as the deductions claimed on the return are proper and substantiated, how is this “inaccurate” or “incomplete”?

Yeah, this is going to degenerate into a question of the meanings of words, really fast.

What is the "accuracy" requirement, how is it defined, and where is that definition found?

What is the "completeness" requirement, how is it defined, and where is that definition found?

Get back to us when you're right [accurate] and finished [complete].

***Better Question***

What is the penalty for failing to claim every last penny of deductions that we're allowed to claim?

So, I just don’t see how only deducting some of the eligible taxes or some of the contributions that the client paid during the year is preparing an “inaccurate and incomplete return.”

I don’t either. Do your best to not take TaxEA’s comments too seriously, given that they are usually wrong, misguided, or something similar and are never backed up with any authority.

Obviously, if one is permitted to pick and choose his deductions, then the return would be accurate and complete if certain deductions were omitted. And if one is not permitted to pick and choose his deductions, then the return in OP’s case wouldn’t be filed that way, that’s why OP is asking the question.

In any case, this question has been beat to death in the past:

viewtopic.php?f=8&t=5390&hilit=maule+welcome

You’ll note that the Professor that wrote the treatise on the matter, which is replete with citations, chimed in with a response. Yes, there are some exceptions to the general rule that you don’t have to take all of your deductions, like when the EIC is at play, but by and large, you can pick and choose.

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You’ll note that the Professor that wrote the treatise on the matter, which is replete with citations, chimed in with a response. Yes, there are some exceptions to the general rule that you don’t have to take all of your deductions, like when the EIC is at play, but by and large, you can pick and choose."
My point exactly...this would make the return inaccurate and incomplete

I have at time advised clients not to itemize as the additional deduction due to state/local income taxes were just going to bite them in the ass in the following year due to having to include the state/local overpayments/refunds on that return. Even if you elect to apply those state/local refunds to the following year state/local taxes they are taxable income in that year.

Jake I don't believe that to be true. If the deduction of the state taxes did not save any federal taxes then they are not taxable. Similar to the logic that only some of the state taxes are included in income the following year depending on if they saved more than had been saved if sales tax were deducted.

Regarding EIC, the only time you must take all allowable deductions is when the income is from self employment. Schedule A deductions are not mandatory. If you live in a state (ie Illinois) that doesn't tax retirement income and you take a huge distribution from your retirement accounts, withholding for Illinois is not necessary but I have clients that don't know this, so a huge amount of tax is withheld. If the client itemized this, the taxable income for the following year could throw the same client into AMT and NIIT, so we went with the much lower state sales tax for this retired client. Did I file an inaccurate return? Client saved a lot more in taxes the following year. (Huge inheritance from deceased sister's IRA and brokerage accounts)

Was a taxpayer's auto mileage driving to and from his income tax preparer's office to have his income tax returns prepared and filed an allowable Section 212 deduction last year?
If it is, and you prepared the return and you didn't claim the mileage deduction for your client, did you then prepare an inaccurate and incomplete return for your client? And did you sign the return?
Angels dancing on the head of a pin, this is nothing more than, I say, after a night's sleep and some caffeine.

My point exactly...this would make the return inaccurate and incomplete

No, that wasn’t your point, since the OP’s question didn’t’ involve the EIC and/or business deductions.

Some clients won't take a deduction because they don't want to save the receipts

Some deductions aren't allowable unless they are properly documented. Angels on pinheads.

Jake I don't believe that to be true. If the deduction of the state taxes did not save any federal taxes then they are not taxable. Similar to the logic that only some of the state taxes are included in income the following year depending on if they saved more than had been saved if sales tax were deducted.

Perhaps I didn' exactly state it correctly.

If the standard deduction is $10,000, and the taxpayer in a 15% bracket has $11,000 in itemized deductions, itemizing deductions would result in a $150 larger federal tax refund. But if then he gets $1,000 in state income tax refunds that $1,000 will be reported as income on the next years return, and if in the same 15% bracket he will pay $150 on that.

"...and if in the same 15% bracket he will pay $150 on that."

But if he's in the 39.6% bracket when he's taxed on the refund [overpayment, credit, whatever] would he prefer to not have deducted the $1,000 and would that be acceptable under our tax laws?

To restate the original question, when claiming Itemized Deductions, must the taxpayer claim ALL ALLOWABLE deductions or may the taxpayer claim only some of the deductions[?]