WHEN JANET YELLEN was nominated to be Secretary of the Treasury, the Senate Finance Committee staff went over her tax returns with a magnifying glass. Yellen, an economics PhD who taught at Harvard, always prepared the returns for herself and her husband, economics Nobel laureate George A. Akerlof.
“She discovered to her surprise that she had been doing the family taxes wrong for years,” reports Owen Ullmann in his excellent new biography of Yellen, Empathy Economics. “She had listed George’s book royalties on Schedule E, which is for rents, royalties, and partnerships. That seemed the logical thing to do but it was wrong.”
Book royalties, it turns out, “go on Schedule C, which is for income from a sole proprietorship or profession.” The mistake meant that they’d overpaid their taxes for years because, on Schedule C, they could deduct more business expenses from his royalty payments. Still, as a result of Yellen’s error, they had to amend their past returns and refile them.
This time, though, they had to ransack their records to document every last deduction. Yellen found “the level of scrutiny horrendous and the entire process abusive,” according to Ullmann, who was granted a dozen interviews with her in preparation for his book.
Let me just say this: If Janet Yellen can’t get her taxes right, what hope is there for the rest of us?
I just spent the morning estimating my quarterly tax payments owed to the federal government and the state of Pennsylvania. I found the process as easy as getting tickets to a Taylor Swift concert—only more expensive and without any music at the end.
Please understand: I don’t mind paying taxes. As someone once said, they’re the price we pay for civilization—if that’s what you call this. No, it’s the complexity that I find vexing. If this were an Olympic competition, filing your taxes should rate an 11 out of 10 on the degree of difficulty.
When I find things hard, I tend not to blame myself—although, honestly, a lot of this is on me. No, I begin to grouse about the confounded system. I mean, who in their right mind would have you mail a check to “P.O. Box 37008, Hartford, CT 06176-7008” if they were trying to make your life easy?
Believe me, I make it hard enough by myself already. Our printer is on the third floor and the checkbook the first. Naturally, I roamed back and forth multiple times because I made various “mistakes,” like listing my wife first on the quarterly payment form when I’m listed first on our Form 1040.
I’ve learned the hard way that the IRS doesn’t get it when you switch the order of names. The lesson: Don’t be chivalrous.
Then there’s Googling the standard deduction, the income tax brackets, the tax treatment of Social Security income and the FICA tax rate for self-employed people. This all came after we’d estimated our income from five different sources.
I tried to find a quick and easy tax calculator online. Each one turned into a chapter from a Franz Kafka novel, wanting more and more detail until I lost the will to go on. I had to hold my old calculator up to a window to get its solar battery to turn on. Eventually, I switched to my iPhone, so now perhaps hackers and Vladimir Putin know how much I make.
Maybe Yellen can do something about all this. After all, she’s in charge of the IRS. Yet it will take an act of Congress to give us what taxpayers in many countries in Europe already have. Their taxing authorities simply email taxpayers a completed tax return, made from records already reported to the government. The whole process takes taxpayers 10 to 15 minutes to double-check and approve.
Each year, I lose days of spring sunshine to tax preparation. I just hope I do a better job than Yellen.
Before she was Treasury Secretary, Yellen was chair of the Federal Reserve. And before that, she served as chair of the President’s Council of Economic Advisors. At every stage, Ullmann notes, Yellen’s work has been defined by meticulous overpreparation. Yet it’s no match, apparently, for the intricacies of the U.S. tax code.
Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.
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Just got your tongue-in-cheek with your title. Lol!
Let us be clear here: the disastrous tax code is not the fault of anyone other than Congress. Congress, as we know, passes the legislation that controls the tax code. The prime directive of any Congressperson is to get re-elected. They get re-elected by raising money to campaign to get people to vote for them. They raise this money primarily by catering to lobbyists and others who donate to their campaigns. In actuality, call it what you like, but these are not donations but rather outright bribes.
These bribes are used to get the Congressperson to write and pass legislation that gives preferential treatment to those who bribe them. Thus, the tax code gets more and more complex as it is continually modified to give the people who bribe them bigger and bigger tax breaks.
Perhaps the only possible solution, but likely not allowable by the US kangaroo court, would be to have some kind of level funding provided for anyone/everyone running for office. Short of something like that, it will not change. Thus (similar to our healthcare system) we have an entire industry that has had to be created and fed constantly to “do our taxes”, yet, provides no real added value.
It can and will only get worse.
I’m a professor and I have book royalties. I’ve always been confused about Schedule C vs. Schedule E for reporting my royalties (I do our taxes on the H&R Block software). I went back and looked at our 2021 return, and yep, I used Schedule E.
I guess I’m still not clear why that’s wrong. I’m not self-employed. I work for a university. I don’t have “business expenses” related to my royalties that I’d use to offset the income. In any case, I’ve been doing it that way for many years and the IRS has never flagged it. Guess I’ll have to do more research before tax season, though hopefully since I’m not being nominated for a Cabinet position, I don’t have to go back and refile all our taxes. We’re not talking about that much money, anyway. I’m not a Nobel laureate!
Another extra source of (modest) income is speaker fees (honoraria), but those are easier to deal with. I get 1099-MISC forms for those and report them under “Miscellaneous Income.”
Agree Greg, and you must understand that the IRS Tax Code is there for businesses and their lobbyist. The Avg. Congressperson (well almost all of them) is ignorant of income taxes and the complex IRS Tax Code.
For 2021 taxes, I had to gather documents (29) and prepare PDFs and upload those to my CPA’s portal. It is worse than pulling teeth IMO and they owed me money. LOL
I, like you, dread tax season and can only look forward to the day I sign (electronically) our tax return and my anxiety level returns to normal.
After my father died, I found that he had kept a copy of every tax return that he had ever filed. One year during WW2 all he had to do was add a couple of numbers to his W-2, sign it, and send it to the IRS.
The formula for determining how much of your Social Security is taxable is so convoluted that it’s hard to estimate the tax because small changes in other income can make a big difference, in some cases making your marginal tax rate as much as 1.85 times your nominal tax bracket. I’ve never seen a written explanation of how to calculate how much of SS is taxable. I finally studied the IRS worksheet. Although I now know how SS is taxed, I don’t think that I could explain it to anyone else.
I read with interest your article regarding Secretary Yellen and her reporting error on her husband’s book royalties. Your article resulted in my reading her wiki summary – https://en.wikipedia.org/wiki/Janet_Yellen to learn more about her.
Dr. Yellen is an accomplished economist, but in my opinion, that has little to do with her knowledge and ability to prepare a complex individual tax return. I have a familiarity bias with the tax code having a degree in accounting and being a CPA who recently retired from a career where I focused on taxes. I have seen other persons make the same incorrect assumption regarding the proper book royalties tax return reporting. I was surprised that their corrected taxes decreased as the incorrect reporting on schedule E means that the income should be subject to self employment tax when reported on schedule C in addition to the income tax. The comment “they had to ransack their records to document every last deduction” likely means they failed to initially claim some deductions which they would have been entitled to regardless of the proper reporting was on schedule C or E. Maybe the deductions were not worth the effort until under the spotlight of the confirmation hearing. I would also speculate that Secretary Yellen’s husband, also a PHD economist and author, had earned income in excess of the maximum social security base and was just taxed at the 2.9% medicare portion of the combined FICA taxes. All that being being said the fact that two PHD economists filing a joint return got the reporting wrong and the third party tax reporting documents did not cause a red flag for the IRS to pick up the error speaks volumes to the needless complexities of our tax code.
I had a small exposure to the New Zealand tax reporting where that government sends a completed return to the taxpayer. It worked great for a traditional W-2 employee, not so for anyone with self employment income.
There is a need for tax simplicity in the USA. Our IRS deals with tax code as written by congress and any fix has to come from congress. Let’s blame those who are responsible for tax complexity.
Overall my general suggestion would be to quit trying to solve social ills and giving economic incentives via the tax code. If an economic problem needs to be addressed by government let congress publicly justify the decision and appropriate the funds. I am not holding my breath.
We can do better and should do so.
Thanks for pointing out that they didn’t pay self-employment taxes. I was wondering why they needed to spend time to find deductions if they over paid their past taxes. It was they actually underpaid their taxes and needed to find deductions to offset the underpayment.
Greg, thanks for this. As someone who stubbornly continues to do his own taxes, and by hand, Janet Yellen’s struggles are a consolation.
Regarding estimated taxes, Bob Hope once quipped that he sent his tax return in unsigned. “Since they’re making me guess how much I’m going to make, I’m making them guess whose return it is.”
The US system really is ridiculous. I grew up in the UK and filed my first tax returns there. It took me maybe as long as ten minutes. I was flabbergasted by the complexity of the US system. But it is like the equally over-complex medical system – too many people are benefitting from it. It’s why we don’t have a simple and free way to e-file directly with the IRS.
Thanks Greg. One of my least favorite subjects but a necessary evil. I have a degree in accounting and have always done my taxes and sometimes those of family members. The complexity of individual taxes has become mind boggling and seems to get progressively worse.
I had a tax issue this year that I have never encountered and was not sure how to handle it. A CPA friend said he would charge me $1,000 to do my 2022 taxes which was probably reasonable considering what he would have to do. I did my research and will DIY with the help of Turbo Tax.
The last thing I want to do is to trigger an audit by our “friends” at the IRS and their new army of auditors they are hiring.
I retired from full-time work a number of years ago. Since then, part-time jobs and mutual fund distributions meant I had to file quarterly taxes. If everyone paid their taxes quarterly, and had to write out a check (no auto-deducts by your employer) there would be instant demand for simplified Fed taxes, and lowering of rates as well. Who would desire to send a check for thousands of dollars every few months, based on what you THINK you will earn, to a system that never seems to have the citizens’ interests at heart?
And I still haven’t found “charity payments to taxpayers” in our Constitution. These allow the Feds to generously distribute the funds of those who work(ed), to those who don’t. EITC = ‘easy income taxpayer charity’.
What’s that you say? I just didn’t look hard enough – “charity” is immediately before the paragraph for “abortion” in Article XIV? OK then, missed that. I must have dozed off after Article VII.
Good to hear that Ms. Yellen had tax return errors. Welcome to the club,
I’ve used TurboTax for many years and find it quite user-friendly.
Came here to say this as well, although the black box nature of it does leave me wondering if everything is being tallied correctly.
I’ve used a spreadsheet for my taxes for many years to estimate and double check TurboTax. I now have an annual competition with myself to see how long it takes after I install the new year’s version of TurboTax before it agrees with my spreadsheet.
Greg, love our topic. What’s unfortunate is that our tax system takes honest people and creates the circumstances to convert honest people into tax cheats, which robs the entire federal system of billions of dollars in revenue every year.
Our tax laws need revision. Very easy. Eliminate this regular abuse of the tax system. Eliminate all (ALL!) deductions for everything and every group who thinks they are entitled. NO BREAKS for any individuals or businesses.
All income, working income, tips, dividends, capital gains, interest, regardless of what form it is received is taxed at the same individual’s personal marginal tax rate.
Keep the progressive marginal tax system. The more one earns the higher percentage one pays.
—— By eliminating all the deductions the marginal tax brackets will be reduced benefitting every taxpayer. We will all pay lower taxes as a result, except for the wide spread abusers and those groups that believe they are entitled.
—— Additionally, the incentive to cheat is erased from the system. Additionally, there will be less need for a IRS audits. It would even be possible that without deductions the IRS could total your income reports and just send the taxpayer an annual bill. The taxpayer would no longer need to spend many hours accumulating paperwork, hiring an account or paying for online tax service programs. Of course, none of this is likely to happen as the tax lobby industry will make certain that our chaotic tax system – which no one fully understands – will remain intact. As for me, I have managed my finances so that I now take the standard deduction. This has made it much easier. Although, this year, I made 1 stock trade and will have to file a schedule D.
And, by the way, what can we do with the huge underground shadow economy?
That’s another story.
Alas, Cody, you hit it the nail on the head – there are millions employed by Fed/State/local income tax authorities, not to mention those working within the tax preparation industry. These folks naturally will rally to the cause of preserving our status quo system for tax-filing.They have historically represented a significant and well-organized lobbying force, determined to quash reform efforts targeting the current tax-filing process.
Don’t mean to be a defeatist, but there are just too many folks with a monetary incentives to preserve the current archaic system for any meaningful tax-filing reforms to occur, at least within my lifetime.
And the potential 87,000 new IRS agents justifying their existence with added collections wherever they can find them.
Sadly you are right. These are the folks that would vehemently oppose changes that would make our government lean, efficient and honest.
I was once audited and had an agent visit my home for the audit. I was told to provide the background to answer 18 questions, each with multiple parts. I provided 18 folders of documents, proving our daughter is really our daughter (529 account payments for college tuition) and other issues. A few hours later, she told me that the IRS owed me $3. What a waste of time and money for both of us. There has to be a better way.
I received a letter from IRS notifying me of a one dollar error in their favor, but told me to disregard payment since the amount was insignificant. But now I am informed that my filings are under scrutiny, just like the billionaire class.