Any requirement to claim itemized deductions?

I apologize in advance for asking this because I could have sworn it's been pretty recently discussed here, but my google-fu is apparently weak and I can't find the discussion.
I know that for self-employment income you are required to claim all allowable business expenses, like it or not (see http://www.irs.gov/pub/irs-wd/0022051.pdf among other things).
What about for Schedule A itemized deductions? To me it's obvious you don't have to (after all, you always have the option of taking the standard deduction even if your itemized deductions are higher -- plus unlike in the SE/EIC case there's no tax benefit to you to not claim deductions you're entitled to). But I'd like a pointer to something official saying that (long story).
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In theory it should matter. Say you make 85k and take a deduction for state income tax paid and you get a refund of state income tax paid. Next year you must report the refund as income, but suppose you make 350k next year, then this refund is taxed at the highest rates. But if you didn't take the deduction you wouldn't report the refund, and the IRS would feel cheated. Then again, it could happen the other way -- you make 350k one year and 85k the next, and the deduction buys you a lot in the first year (assuming you're not in AMT), and adds little tax in the next year you make 85k. The logic of the link above implies that you must take those deductions.
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On 4/8/2011 2:24 PM, snipped-for-privacy@yahoo.com wrote:

The taxpayer would never come out ahead, unless the later year's marginal tax rate were over 100%. The refund, not the deduction, is what's taxed that year. Since that tax is less than 100% of the refund, the taxpayer would be better off taking the deduction, getting the refund and paying tax on the refund the next year, pocketing whatever is left (1 - marginal rate).
It's a different situation if one shifts deductions from one year to another, but that's not what's going on here.
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No. It is officially an election (for most taxpayers) - IRC 63(e).
Who does not get the election: 1) A MFS filer, where the other spouse itemized. 2) A non-resident alien [individual]. 3) A short-year filer changing his accounting period. 4) Non-individuals (Estates, trusts, partnerships, or corporations). They all must itemize or use ZERO.
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Thanks. So you can elect to itemize or not. But if you do elect to itemize are you then required to claim all allowable itemized deductions?
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Probably not. However, it might depend upon the reason the taxpayer has for not claiming all allowed deductions.
Could you provide a scenerio in which claiming some but not all itemized deductions would be beneficial to the taxpayer?
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Right. The IRS doesn't like anything they feel distorts income, and they have the power to correct what they see as a distortion.
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Stu
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This is coming out of an (offline) discussion with someone over what is a "complete" return when the taxpayer thinks she has more itemized deductions than she has on-hand documentation for.
Say the taxpayer has on immediate hand documentation for enough itemized deductions to reduce taxable income to zero. Are they obligated to further go through their files and see if they have made and have documentation for and claim other itemized deductions even though they will give no benefit. Or can the taxpayer just say "Screw it -- my tax is already zero. I don't feel like spending any time looking for more deductions to claim since they won't give me any benefit -- just go ahead and file the thing."
I imagine virtually everyone will just "file the thing" in such a case, but according to the letter of the law are they required to claim all allowable itemized deductions?
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On 2011/04/09 17:36, Rich Carreiro wrote:

Yes. Everyone with any sense will just file the thing in such a case. And the IRS will not pursue an audit to uncover unclaimed deductions. Most likely the law is silent on the matter, which I would take to mean no requirement.
One way to look at it is, the IRS will be happy to create a "complete return" for you (SFR) if you don't file one. And they certainly will make no effort whatsoever to claim every deduction, credit, or even favorable capital gain tax rate available to you. So what's sauce for the IRS is goose for the gander, or something like that...
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deductions?
This does not consider the effects on other tax years: 1) Tax benefit rule for the recovery of a state income tax refund [for a cash basis taxpayer]. 2) Possible NOL, especially if employee business expenses and/or casualty losses exceed "net business income." (This could easily happen if the EBE is job search expenses and the person was unemployed all year.) There may be other things I haven't thought of....
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writes:

Yes. There is no discretion there, once past the election.
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On Saturday, April 9, 2011 8:07:13 PM UTC-4, Mark Freeland wrote:

I don't agree. Take the situation where you've made state tax payments but your final state tax liability is $0. If you claim the state income tax payments as a deduction in the year paid, the refund will be taxable income in the following year. If your tax rate in the refund year is higher than that in the deduction year you will end up paying more tax by claiming the maximum allowable deduction.
Ira Smilovitz
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On 4/10/2011 9:46 PM, ira smilovitz wrote:

payments as a deduction in the year paid, the refund will be taxable income in the following year. If your tax rate in the refund year is higher than that in the deduction year you will end up paying more tax by claiming the maximum allowable deduction.
You may be relying upon another permissible election, which is a bit different from the question being asked. The particular election is that of taking a deduction for state/local sales tax in lieu of a deduction for state/local income taxes.
Of course if the amount of state/local sales tax paid was greater than the state/local income taxes paid, one would come out better by deducting the former. That's pretty much end of story, since in that case one would not be allowed to deduct the state/local income taxes whether one wanted to or not. So we'll dismiss the situation where one elects to deduct sales taxes. Similarly, we'll dismiss the situation where one took the standard deduction (since one could not omit only some of the itemized deductions then).
So when we look at line 10 of the 1040 (amount of refund that's taxable), we need to go to the worksheet on p. 21 of the instructions. That worksheet basically compares the total itemized deductions to the standard deduction, and says that any refund is taxable up to the amount by which the itemized deductions exceeded the standardized deduction.
Suppose you had $15K in itemized deductions (say, a mortgage), and paid in $1K in state income taxes. We may assume you paid at least $1K in real estate taxes (since we're assuming a mortgage). So your standard deduction (MFJ) would likely have been around $12,400 ($11.4K for the base deduction and a $1K allowance for the real estate taxes). The itemized deductions (excluding state income taxes) exceeded this standardized amount by $2,600. Since the refund was $1K, the entire amount was taxable, independent of the fact that you didn't include it in the itemized deductions.
Either you take the $1K extra deduction in 2010 and get back an extra $280, or you don't. Either way, you still owe $330 on the $1K refund in 2011. (Prior post - assumed income results in 28%/33% brackets.)
There is an edge case, where the refund is not fully taxable if not itemized, but is fully taxable if itemized, because that increases the 2010 itemized total, and thus increases the cap on how much of the refund might be taxable. This is the exceptional case, and does show that it is theoretically possible for one to come out better without including the state income taxes. For completeness: Assume $12,401 in itemized deductions without including state income tax. Then only $1 of the refund is taxable. But if one includes the state income tax as a deduction, the total deductions are $13,401, and the $1K refund is fully taxable.
This is more subtle than what you wrote, and I suspect not quite what you had in mind.
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wrote:

Not necessarily. You have to look at the tax benefit rule calculations to determine if ANY of the state tax refund is taxable. For example, let's say your AGI was $10K and your itemized deductions were -
Real Estate Taxes - $4K State Income Taxes - $10K Mortgage Interest - $6K Personal Exemptions - $3K
Taxable income is now less than ZERO - and while you deducted the state income tax you got no benefit from that deduction. You could have left it off the return and still had taxable income below ZERO and paid no tax. So just because you show it on Schedule A does not automatically make it taxable the following year.
Gene E. Utterback, EA, RFC, ABA
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On 4/11/2011 2:42 PM, Gene E. Utterback, EA, RFC, ABA wrote:

My take on 1040 line 10 (taxable part of the refund) is that that the refund is taxable to the extent that your itemized deductions exceeded the standard deduction (see worksheet, p. 21), regardless of whether that deduction helped you. So I think here the refund is taxable.
Using your example (single filer) Standard deduction - $5700 + $500 (real estate tax allowance) Itemized deductions - $20K Max amount of refund that's taxable = $20K - $6200 = $13,800
So if the state income taxes were included in Schedule A, it seems that the refund is fully taxable (since the refund was $10K or less, by hypothesis).
But I erred in saying that the refund could be taxed if it wasn't included in the itemizations. Line 1 of the worksheet says, in bold font, that one does not tax more than the amount of state income taxes itemized on Schedule A.
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Your impression is mistaken. You only add the state income tax refund, or any tax refund for that matter, if you actually got a benefit from it in the previous year. See the tax benefit rule.
BEGIN QUOTE http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._111._Recovery_of_tax_benefit_items
Sec. 111. Recovery of tax benefit items
(a) Deductions Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter. (b) Credits
END QUOTE

The most common scenario is that person falls in AMT. In this case, it's likely that the entire refund is not taxable.
People in AMT might get some benefit of the state income tax deduction. Say you paid $14,000 in state income tax for a given income. It's possible that you have no AMT. But suppose you instead paid $20,000 in state income tax for that same income. Your regular tax decreases as it should (by 33% of $6,000), but the AMT increases by exactly the same amount. So if you receive a refund of $1,000, then none of it is taxable. If you receive a refund of $7,000, then only $1,000 of it is taxable.
Gene's example is slightly different. In this case the person's itemized deductions are more than AGI, so some of the personal deductions were not really used (nor do they generate a NOL). So if you receive a state income tax refund then it's possibly not taxable as you didn't even need to enter it on Schedule A in the first place.
The above quote is even more generous because of tax credits. Say because of the state income tax deduction your taxable income and tax was $0 but you had $300 of unused child tax credit. If you didn't deduct say $1,200 of your state income tax, then you would have been able to use all of your child tax credit and the total tax would still have been zero. So if next year you receive a refund of $1,200 or less, then none of it is taxable.
In years other than 2010, itemized deductions are phased out for high income earners. The phaseout was eliminated for 2010, and might be gone for 2011 and 2012 too (not sure). So you might deduct $50,000 of state income tax, but your itemized deductions are limited to 20% of their original value, or $10,000. If you were not in AMT the previous year, and you receive a refund of $40,000 or less, none of it is taxable.
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If I'd paid $10,000 less in state income tax, I'd have received $2,000 less in deductions. So if I get a refund of $10,000, $2,000 of it should be taxable. At $50,000 refund, $10,000 is taxable, but it's 20% across the board, not the last $10,000.
Seth
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wrote:

calculations to

let's say

state
left it

tax. So

Actually, his impression is not in error. If the subtraction of the tax paid causes the total itemized deductions to be less than the standard deduction, then not all of the refund will be taxable. Do the math following the rules and you will find that result. The amount that brings the itemized deductions up to par with the standard deduction is the amount that did not reduce the amount of tax (as per IRC 111, which you quoted - below) and is thus excluded.

http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._111._Recovery_of_tax_benefit_items
Note: Employee business expenses and casualty losses (both Schedule A items) can contribute to generate NOLs. EBE for this purpose includes job search expenses and cost of suits against former employers (e.g. wrongful termination).

Correct: The tax is after non-refundable credits. The computation can be a real mess if a carried-out credit is involved, because there may be a tax offset (in another year). If the credit carries back only, then the tax benefit is known. However, if a credit carries forward, there's no guarentee that it will yield a tax benefit -- as opposed to being carried forward forever one year at a time.

Also correct - because 80% of it received no deduction.
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Yes, it is.

Look at it the other way around:
Standard deduction, $5700. Itemized w/o state income tax, $5500 State income tax paid, $1000
Federal income tax w/ standard deduction: $0 Federal income tax w/ $6500 itemized: $0
How much of the $1000 refund of the state income tax paid is taxable? I say none, because it didn't affect his federal income tax amount.

Also wrong, because $40,000 received a $8,000 deduction.
Seth
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On Apr 13, 3:09pm, snipped-for-privacy@panix.com (Seth) wrote:

Your thinking is that for every $1 of itemized deductions you get a benefit of 20% of it. But I think that's wrong. It's rather that the first 20% of itemized deductions were deductible, here the first $10,000. This rule is more generous for taxpayers and seems to follow from the statute.
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