1.  Broad Study – Simple Averages¹

The Statistics of Income Division (SOI), in accordance with IRC§6108², produces an online Bulletin quarterly, providing the most recent data available from various tax and information returns filed by U.S. taxpayers. The Spring 2017 SOI Bulletin³ includes preliminary analysis of Individual Income Tax Returns filed for tax year 2015.  The analysis is based only upon the size of Adjusted Gross Income, it does not consider filing status.      

For Tax Year 2015, taxpayers filed 150.6 million U.S. individual income tax returns, with 69.15%⁴ of those claiming a standard deduction.  As a result, 44,477,185 returns were filed in which the single or married taxpayers itemized their deductions. Many of those returns were filed by paid practitioners. Practitioners are interested in how many of their clients returns will continue to itemize deductions given only two surviving deductions coupled with higher standard deductions currently proposed.

Selected data from the Spring 2017 SOI has been gathered to calculate such a projection, which begins as follows:

Under currently proposed plans only mortgage interest ($8,527) and charitable contribution ($5,491) deductions would survive under tax-reform. The sum of the averages of these surviving deductions amounts to $14,018.

If the above calculation were a “median,” half of Schedule A filers would be above $14,018, and half would be below $14,018. Should the standard deduction be raised to the $12,000/$24,000 range, it first appears as perhaps 50% of current Schedule A filers would claim the standard deduction. However this would be an incorrect assumption as the figure is not a median, it is a simple average, and other criteria must be considered.

2.  Averages can be easily misunderstood

The above calculations are for total 2015 returns filed, yet the data does not distinguish between filing status; single, married filing jointly or separately. The average for single taxpayers as compared to the average for married filing jointly cannot be gleaned from the SOI data. However, practitioners are keenly aware that taxpayers with higher AGIs tend to evolve into Schedule A filers. With this in mind, the Spring 2017 SOI does allow for the above calculations to be performed at several AGI thresholds.

Of the 44,477,185 returns which itemized, 24,032,828 reported AGI of less than $100,000. Surgent CPE estimates that a vast majority of the returns with AGI under $100,000 would not itemize.  The combined effect of the itemized menu reduced to only mortgage interest and charitable contributions, coupled with the higher $12,000/$24,000 standard deductions, Surgent estimates only a small percentage in this strata will complete Schedule A.

As for the remaining 20,444,357 Schedule A filers, the following chart reports a simple average based upon three AGI ranges⁵:

Again, under currently proposed plans, only mortgage interest and charitable contribution deductions would survive. Here’s the sum of the averages of these surviving deductions:

Surgent CPE estimates the following numbers of taxpayers per AGI strata who would continue as Schedule A filers after implementation of currently proposed tax reform.

In 2015, a total of 44 million taxpayers included Schedule A with their tax returns. If the proposed reforms limiting deductions to mortgage interest and charitable contributions, coupled with the higher $12,000/$24,000 standard deduction do become law, Surgent CPE estimates an overall reduction of more than 80 percent in Schedule A filers.

As each wheel and cog change in tax reform discussions, the above calculations would also change.

Interested in learning more about Surgent’s projections? Register for our downloadable self-study course: Federal Tax Update.

Scenario: Indicted under the Law of Averages? – Just your Average Joe (or Jeanne)

Mathematicians are purposely reserved in utilization of “averages” as they can easily be slanted or manipulated. They normally choose more refined terms as “mean⁷” “median,⁸” “mode,⁹” and “range.¹⁰” Averages can be easily misunderstood, such as with life-expectancy.

In 1965, André-François Raffray, aged 47, agreed to purchase the apartment-style home of 90-year-old Jeanne Calment in Arles, France. The home’s value was estimated at nearly 500,000 francs.  The purchase agreement was made under a French compact “rente viagère” which bears a resemblance to the seller receiving both a life annuity and a life estate in the property. Raffray agreed to monthly payments of 2,500 francs to Jeanne for the remainder of her life, with ownership passing to him upon her death.

Jeanne was 90 years old at the time, and given her advanced age, Raffray must have anticipated he made quite a steal. After all, 30,000 francs per year versus the average life expectancy of a nonagenarian¹¹, how could he lose?

By 1975, Raffray had paid 300,000 francs toward the property he neither owned nor lived in, as Jeanne ventured into centenarian¹² status. Raffray may have consoled himself in the fact that he still paid much less than fair value and the life-expectancy tables continued to be on his side. He would soon discover a similarity Jeanne had with the “Hundred Years War”¹³– that similarity being – they both lasted more than 100 years!

By 1985, Raffray had paid more than fair value, about 600,000 francs toward the property he neither owned nor lived in. On average, about one in 1,000 centenarians become a supercentenarian¹⁴. Someone has to be the “one’ in calculating that average – it happened to be Jeanne, recognized in 1988 as the world’s oldest living person, a title she would hold for the better part of a decade.

In 1995, Raffray passed before ever living in the apartment to which he had paid about 900,000 francs, approaching double fair value. After his death, his family was required by the agreement to continue Jeanne’s life annuity payments. Local reports detailed that on the day of Raffray’s death, superdupercentenarian¹⁵ Jeanne dined on duck, cheese and chocolate cake at the age of 120 years.

Jeanne Calment passed in August 1997 at the age of 122 years, 164 days. Per her wishes, the driver stopped by her house for which she had collected a monthly payment for 32+ years, before proceeding to her final resting place.

1.The discussion and calculations are for discussion purposes only and should not be utilized in tax planning.  As each idea in tax reform changes, so would the calculations and assumptions made in this study.

2. IRC§6108 Statistical publications and studies.

3. Released May 30, 2017; News Release 2017-101.

4. Actual figures are 150,565,918 returns with 104,117,197 claiming the standard deduction, or 69.15%.

5. Again, the data does not allow for analysis of single vs married vs head of household status.

6. Total of returns which include Schedule A.

7. Generally considered an “average” of a group of numbers.

8. A number which is in the middle of a set of numbers arranged from lowest to highest.

9. A number that occurs most often in a set of numbers.

10. The largest number in a set less the least number within the same set.

11. A nonagenarian is an individual who is from 90 to 99 years old.

12. A centenarian is an individual who is 100 years old or older.

13. The Hundred Years’ War, a conflict between England and France lasted 116 years from 1337 to 1453.

14. Or hyphenated as super-centenarian, is an individual who has lived to or passed their 110th birthday.

15. There is no such word, it is penned (conceived) by this author. Although 120 years of age, Jeanne is still technically a supercentenarian, as a reference for an individual who is 120 or older appears not to exist.

Dennis P. Benvie MS, CPA is Director, Tax and Advisory Content, for Surgent CPE. He has been in practice for more than 30 years and has been a national CPE Discussion Leader for 25 years.