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Outside the Box

Michael Flack

MY FIRST JOB AFTER college was as an officer in the U.S. Navy. I was an engineer on a nuclear-powered submarine, the USS Albuquerque. While I didn’t make the Navy a career, it left one indelible imprint on me: the need to understand how things work.

Before ever setting foot on the Albuquerque, I spent more than a year learning exactly how nuclear power propelled a submarine, everything from how to operate a valve—it isn’t as simple as you think—to how the reactor worked on a sub-atomic level. The point of the training: understanding how it all worked was just as important as how to work it. The reactor wasn’t a mysterious black box that provided power, but rather a force that needed to be continuously studied and eventually mastered.

When I left the Navy for corporate life, the headhunters I used made it clear to me that corporations do not view training and knowledge as favorably as the Navy and, in fact, many companies viewed training as a cost to be avoided.

And they weren’t wrong, as I quickly learned whenever I had an issue with a corporate software program. I would call the IT help desk and inform the folks there of the problem, and generally they provided the correct solution. But when I asked how the issue came about or how to prevent it in the future, I was met with silence. It quickly became clear to me that, while many people understood how to operate various IT systems, few—if any—truly understood how they worked. On the Albuquerque, technical knowledge was a badge of honor to be proudly displayed, but in corporate America it was a sign that you were no longer on the fast track. I said to myself, more than once, “You’re not in the Navy anymore.”

I thought about that recently when I was doing my taxes. I use TurboTax and, while its data entry capabilities and general layout leave much to be desired, the biggest disappointment is that it’s just a $70 black box. You input the numbers from your W-2s, 1099s, K-1s and so on, and TurboTax spits out the size of your refund, if you’re lucky, or amount owed, if you aren’t. If you’ve used TurboTax or one of its competitors, you know these programs provide zero context, analysis or tax training. I think this is done to ensure you keep coming back every year. Problem is, you’re none the wiser about your specific tax situation or how to create a tax game plan for the future.

Prior to the personal computer, you had only two options. You either took your shoebox full of receipts, W-2s and 1099s to your accountant or you got out your pencil, calculator and IRS instructions and got to it. Note that I said pencil. You knew mistakes would be made, but that when it was all done you would be thoroughly familiar with each and every number. I’m not sure if tax regulations have become more complex, but I do know that using pencil, calculator and IRS instructions is no longer an option for most of us. I tried entering all the details from a single K-1 using a pencil… once. Maybe it’s due to the deep state, TurboTax lobbyists or just plain laziness, but now the only two realistic options for ordinary mortals are your computer or your accountant.

If, at this point, you’re content to let TurboTax continue to spit out your tax forms, read no further. But if you’ve always been bothered that TurboTax doesn’t provide at least a modicum of tax analysis, and instead just changes the refund amount like the reels on a slot machine whenever you input another 1099 box number, read on to learn how this TurboTax knowledge vacuum can burn you. Here are two examples:

  • Foreign tax credit. If you’re married filing jointly and pay more than $600 in foreign tax, your foreign tax credit will be limited. If you’re also retired, it may be drastically limited, as I discovered.
  • Standard deduction. If you’re employed and think that the standard deduction is the portion of income not subject to tax, you would be correct. What if you’re retired and not earning “wages, salaries, tips, etc.”? You would still be correct—but perhaps missing a golden opportunity.

For those who are married filed jointly, the standard deduction for 2021 is $25,100. If you’re retired and not yet drawing a pension, annuity or Social Security, keeping your ordinary income—including interest, unqualified dividends and short-term capital gains—below this amount may enable you to pay no federal tax.

But here’s the kicker: That can be true even if you have hefty amounts of qualified dividends and long-term capital gains. Suppose you claim the standard deduction in 2021. This year, you could have total income of up to $52,950 if you’re single and $105,900 if you’re married, and you wouldn’t owe any taxes on your long-term capital gains and qualified dividends.

I only realized this after a few years of not quite understanding why the TurboTax refund number did and didn’t change after inputting various categories of income and deductions. It finally took me creating my own tax spreadsheet to fully understand the ramifications—and the huge opportunity it offers retirees. For those of you thinking there are websites with tax calculators I could have used, I will defer to Nassim Nicholas Taleb, who said, “What I learned on my own I still remember.”

TurboTax and its ilk are the perfect black box. They give answers without understanding and facilitate forms without context, all done with a veneer of insight. It has cost me more than a couple of bucks and makes me wonder if maybe I should hire an accountant. But then I wouldn’t even have the pleasure of inputting my tax numbers, removing me from the process even further. Would my new accountant then become a more expensive and shinier black box? And I don’t even want to think about the cost of her inputting all those K-1s.

Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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