Lost in Deduction: Taxpayers’ Mistakes when Itemizing

Abstract:
Taxpayers can reduce their tax liability by itemizing deductions and claiming more than the standard deduction they are automatically entitled to. I show that taxpayers also itemize when costs exceed benefits, a behavior that is strictly dominated by not itemizing. Using German administrative income tax data, I document that 57 percent of tax filers make this mistake at least once. They itemize even when the sum does not exceed the standard deduction, or when they already face a zero tax liability before itemizing, or both. The observed itemizing behavior is consistent with a model with optimization frictions in which some taxpayers always itemize regardless of the costs and benefits.