I’ve been doing my own income taxes for many years now. A long time ago I discovered that it was faster, easier, cheaper, and more accurate to do it myself using TurboTax rather than use an accountant. But easier and faster doesn’t mean easy and fast. In fact, it’s a real pain in the ass and I hate doing it – which is why I suspect that many people use accountants for this ugly task – especially for more complex tax returns.
But doing my income taxes myself gives me a unique insight into how our whole convoluted tax code works. Imagine if everyone:
- Had to find out where their K-1 income and deductions ended up on their tax returns
- Had to calculate their kids’ income tax using form 8615 or 8814, which requires you to simultaneously prepare tax returns for yourself and all your children and then enter information from each return on the others.
- Had to calculate their foreign tax credit using an allocation based upon the percentage of your income and tax basis associated with foreign mutual funds vs. your total investment portfolio and then never have it make any difference
- Had to recalculate their capital gains on publicly traded partnerships (which look like and act like regular stocks) based upon the cumulative income, losses, and return of capital of those partnerships passed along over the years via the K-1s
- Tried to find out where their income and losses from section 1256 contracts and straddles passed along from their publicly traded partnerships ended up on their tax returns
- Got taxed on income from partnerships but was then unable to deduct the losses because they were considered “passive”. Those losses then get carried over to future years.
- Got taxed on all their capital gains over the years but then when you have a really bad year you can’t deduct more than $3000 of your losses from the same types of transactions and then have to remember to carry it over into future years.
- Had to go back and adjust their tax basis on short interest 4 times per year because they can’t deduct the dividends they have to pay out when they pay them and then when they add to and subtract from those short positions they have to keep track of separate tax basis for each tax lot held
- Had to go back and adjust the tax basis of an investment when they bought and sold it in a short time frame because it was considered a wash sale – but only when there is a loss, not a gain
- And new this year: had to separate all their investment transactions into 3 different categories based upon whether or not their stock broker reported their tax basis to the IRS or if it is neither true or false that they did report it?!?!?!?!?!
It’s clear from working through these issues that our tax code suffers from layer upon layer of “fixes” that were added over the years to prevent taxpayers from taking advantage of clever schemes to reduce their taxes. The result is an incredible bowl of spaghetti of if-then-else conditions inside a black box that make the end result impossible to predict and almost impossible to calculate.
I have no doubt that if the average American had to do their own taxes they would clamor for a far simpler system.
Amen. Better yet, if everyone had to pay their tax bill at the end of the year instead of having it withdrawn slowly from their paychecks, they’d really get a sense of how much the govt is really screwing them. The automatic deduction is why there hasn’t been a tax revolt.
The tax code is how politicians dole out favors which is why it is so complicated.
Further, EVERYONE should have to pay something to the government in federal taxes. This way, people aren’t so quick to try to want to raise other people’s taxes. Every tax increase/decreaes should apply to all tax payers.
And amen to that. I think it’s disgraceful that 47% of the country pays no income tax whatsoever and then the president has the audacity to make an issue of a handful of millionaires that pay at a lower rate than SOME people.
Which parts of the federal government do you want to cut? The military? Medicare? Social security? Medicaid? Stop paying interest on the debt (e.g. default)? Unless you have an actual plan to cut spending, you are just blowing smoke. The five items I listed account for the lion’s share of federal spending.
A few other points Gary. Would you like to trade economic places with one of those people? Most of them make less than $40K per year and almost a third live on less than $10K per year. Yeah, life is great with no federal income taxes.
And of course many who pay no *income* tax do pay federal payroll taxes.
Agreed. Completely eliminating ALL income taxes and replacing it with a VAT would eliminate all the needless waste that is the tax planning/accounting industry. No American should have to file a *personal* income tax return.
It would also force a change in our consumption patterns, which would be a good thing given the dramatic increase in energy costs we’re likely to face in the next couple decades, barring the achievement of commercially viable fusion. Ha ha
As for cutting government spending…let’s eliminate all subsidies including the mortgage interest deduction. And social security is for the most part self-funding (the revenues and costs shouldn’t even be part of the budget because it just confuses matters). Medicare and medicaid are a huge problem because someone set up this benefit without figuring out how to pay for them. They should also be off budget and self-funding. If people want this benefit for themselves then they should be willing to pay for it out of their own pockets. The fact that everyone pays payroll taxes is a smoke screen for the real issue. They are paying for a benefit for themselves and not even the full cost. What needs to happen is that everyone needs to contribute something to the cost of running the rest of the government – even a small amount – so that when they vote they aren’t just voting to raise someone else’s taxes. That’s Russ’ point and I couldn’t have said it better myself.
I have two very close family members with taxable income in the mid 50s. One paid about $8K in taxes and the other RECEIVED $1K from the government. Let me clarify…that second family member, who is actually well off, paid NEGATIVE taxes this year. I’m not talking just a refund here. I’m talking getting back more than they withheld.
The system is really messed up. I’d like to see it gradually replaced with a national sales tax, with exemptions for food, housing (within limits), and medical care. Stop taxing income and savings and start taxing consumption.
My God! You wrote that at the EXACT same time I was writing the same thing. You are brilliant man!
You are complaining about people not paying any federal income taxes, and you want to eliminate the mortgage interest deduction? I happen to agree with you, but that deduction heavily favors the *upper* half of earners — you know, the ones with big mortgages.
You do realize that income taxes on high-income earners are at 50-year lows? Check out the 1960 – 2010 graph at http://www.nytimes.com/imagepages/2012/04/13/opinion/sunday/0415web-leonhardt.html?ref=sunday-review
This long drop in the tax rates is one of the big reasons we have such a large national debt.
I just want to make sure that the income tax burden is spread around. I also have a problem with using the tax code for social engineering – like promoting home ownership or subsidizing solar energy.
Yeah, I’ve seen the historic tax rates. I think they are much more reasonable now. The government just got used to spending huge amounts of money and needs to reign it in. Some of the losses can be offset by eliminating all the subsidies. Also, a lot of what the government spent money on recently has been a total waste. That so-called stimulus package was a joke. Instead of investing in infrastructure and creating real jobs they just gave away most of the money.
WestLooper, you are making some big assumptions. I want spending cuts. I don’t have any sacred cows. Dept of Ed could probably be eliminated. HUD could probably be 1/5th of its size. Military spending is obscene. Medicare, welfare, etc all should probably be state solutions instead of Fed Govt.
Regardless, we have a SPENDING problem, not a revenue problem. You could confiscate ALL the income from the top 1%, 5% or whatever and it still would not make a dent in our spending. This big issue is that no matter what you try to eliminate, someone is going to cry bloody murder and how it is hurting the children. Even a freeze on growth is accused of being a “cut” and will throw grandma out on the street. Until we have real entitlement reform, cuts in military spending, and the like, we will continue to have this problem.
EVERYONE needs to understand what it costs to run the government. You cannot have half the population with no skin in the game. I don’t care if the lower incomes have to pay $100/yr they still need to pay SOMETHING and no one should be getting more back than they put in a la EITC. If they can afford cell phones and cable, they can afford to pay some taxes.
When taxes are increased, EVERYONE needs to feel it. That is the only way we can control spending.
would we save/gain anything if we reduced the IRS to a skeleton agency and eliminated TSA?
also what do you say to the idea of eliminating the mandatory filing of returns as cited in this blog
http://blogs.chicagotribune.com/news_columnists_ezorn/2012/04/did-you-fudge-your-taxes.html
I assume the TSA is pretty necessary but the IRS could be scaled way back if the tax code was simplified. If they ever audit me I pity the fool they send. He may never see the light of day again as he plows through my records. In the end they may determine they owe ME money.
The problem with auto-returns is that it santizes the whole process – kind of like withholding. When people have to plow through the calculations and write a check it gives them a whole new appreciation for the need to simplify the system.
But the IRS appears to be going towards more an more auto-calcs. The whole capital gains situation is moving that way and it’s kind of scary. I don’t trust the systems to get it right.
TSA could easily be eliminated. All it is now is a union jobs program – good luck downsizing it now. Just a worthless knee jerk reaction to 9/11 like most government programs. The airlines/airports could do a better job privately. Second, no one will ever hijack a plan again unless they kill all the passengers, so it is completely pointless to spend all this money on the security measures at the airports now. It would be cheaper and more effective to just put undercover armed agents on every flight instead of operating the fustercluck we call the TSA at airports.