Ok, we know, you figure you're about to get a lecture on who really pays the income taxes in this country. In the interest of full disclosure, we might tell you that later on, but in the first part of our article, we thought you might like to see how your itemized deductions stack up against those in your income bracket.
There are two basic reasons for giving you information on "average itemized deductions." The first reason is that some people have fun comparing how much they spend/give to those in the same income bracket. The second, and arguably more important, reason is that you can sometimes open yourself up to IRS scrutiny if you claim too much in itemized deductions. Don't worry about this second reason, though. As long as you fully document your deductions and those deductions are legally claimed, you have nothing to fear.
Now that we have set the stage, let's take a look at the "averages" from the year 2001, the last tax year for which complete data is available.
Medical expenses. Medical expenses are one of those necessary evils that most of us have to pay, regardless of income. True, there are some folks who earn so little that various governmental programs pay the medical bills, but there are far more people who spend a great deal of their income on medical bills through either insurance premiums, out-of-pocket costs or some combination of costs. In 2001, the typical taxpayer paid somewhere between $5,500 and $36,000 in medical expenses. The breakdown by adjusted gross income was:
Bear in mind that the foregoing amounts are averages only. We have seen many occasions when the amounts were far less, and there have been more than a few instances where we have seen people with $100,000 plus incomes who spent far more than that in medical expenses.
Income, real estate and personal property taxes. If medical costs seem a little regressive in nature, taxes generally increase in amount as incomes increase. There are several reasons for this including higher income taxes that follow higher incomes and higher property taxes attached to properties with higher values. For 2001, the typical deductions were as follows:
Interest deductions. Included in this category is interest paid on mortgages collateralized by a first or second home as well as investment interest. Again, the typical deductions for interest increase consistently with increases in income. While you may think this makes sense because of bigger homes typically associated with higher income taxpayers, don't forget that many taxpayers make money by borrowing money to invest in stocks, bonds and other investment assets. This investment interest can, in some cases be a hefty amount. The interest deduction by income category in 2001 was as follows:
Contributions. As with interest and tax deductions, contribution deductions generally increase as adjusted gross income increases. As adjusted gross income increases, disposable income also increases, in general. There are many times, however, that this is not the case. For example, consider the case of a building that has depreciated to zero, but for one reason or another, it is mortgaged to the hilt. Even though the owner may show a gain on the sale of such a property, the bank gets all the cash and, accordingly, there is no income left to give away. Typical deductions in 2001 were as follows:
While the "typical" deduction amounts discussed in the preceding paragraphs are simply averages, they do give you a ballpark of what an IRS agent might expect to see on a typical tax return. Do not take these averages as what an IRS agent will allow in the absence of proof. As with all tax return items, be sure you have proof before you take a deduction. Regardless of all else, proper documentation is your best defense should your return be examined.
We promised to talk a little bit about who pays the bulk of the income taxes in the United States. Before we give you numbers, don't forget that these are income taxes and not social security, medicare or self-employment taxes and such taxes aren't included in the following statistics. Now that you have been warned, here is a breakdown of taxes by income brackets according to IRS statistics:
Unfortunately, these statistics are not available for years after 2001, but we suspect the percentages are not far off for 2002 and 2003, despite tax decreases in the past few years.
Realistically, about all the foregoing statistics tell you is that a relatively small number of Americans pay substantial income taxes. This is not meant to be a political statement on either side of the income tax debate, but simply a statement of fact. As we said earlier, this also does not factor in the effect of payroll taxes or the earned income credit many Americans receive.
Conclusion. This article is meant merely to assist you in determining how reasonable your own taxes and deductions are in light of your adjusted gross income. If you find that you are far outside the norm in some cases, give us a call. We would be more than happy to discuss your individual tax situation with you.