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.