FREE NEWSLETTER
MY TAX RETURN IS too complicated by far, and yours probably is, too. I lose hours looking up figures online, then toggling over to TurboTax to enter them in different boxes. It doesn’t help that I tend to pile, rather than file, important financial papers.
I take the job in stages because it’s so boring. I’ve also learned not to file early because late-arriving mail can upset my math. It happened again this year, when I got a letter informing me that I needed to report a forgiven debt as income.
When I finally submit my tax return, I cross my fingers that I’ve got it right. Some years, I’ve gotten a letter from the IRS informing me that I owe more money. Other years, a letter says the government owes me—once, incredibly, $5,000. This year, I got my expected refund from the U.S. Treasury.
It doesn’t always go so smoothly. In 2020, when Janet Yellen was nominated to be secretary of the treasury, which oversees the IRS, a part of the vetting process was to check her tax returns for accuracy. It turned out this painstakingly well-prepared Harvard economics professor and former Federal Reserve chair had done her taxes wrong—for years.
She’d reported her husband’s book royalties on a tax form called “rents, royalties, and partnerships.” That sounds logical, but book royalties should be reported on Schedule C, which is income from a sole proprietorship or profession.
A similar thing happened to Timothy Geithner when he was nominated to be treasury secretary in 2008. Auditors found that he’d neglected to pay more than $34,000 in Social Security and Medicare “FICA” taxes while working for the International Monetary Fund. IMF employees don’t owe FICA taxes unless they’re U.S. citizens, as Geithner was. They must make the payments on their own because the IMF doesn’t automatically withhold FICA taxes from pay.
Geithner missed this fine print when he prepared and filed his own tax returns in 2001 and 2002. Then, the accountant who prepared his returns for 2003 and 2004 told him he didn’t owe FICA taxes as an IMF employee. Plausible perhaps, but wrong.
What does it say when the presumptive treasury secretary can’t file his or her tax return correctly? Perhaps our tax filing system has become too complex for human comprehension.
About 80% of the annual government paperwork burden on citizens is the result of the Department of the Treasury and IRS requirements, according to Cass Sunstein, a Harvard law professor who has tried to cut this workload. In his book Simpler, Sunstein reports some successes, such as the 1040EZ for simple tax returns and the ability to file taxes electronically. Yet Sunstein says not much more can be done without a thorough rewrite of our bloated tax code.
How did we get such a convoluted mess? It’s not the fault of the IRS, which is just the referee in a bizarre game. In his book A Fine Mess, author T.R. Reid concludes that the U.S. government made a fateful error by retaining its old system of business taxation when it added the personal income tax in 1913.
Before then, the government mainly taxed business activity—things such as tariffs on imported goods and excise taxes on alcohol or tobacco. The income tax was supposed to soak the rich only, but expanded as the U.S. needed the revenue to fight two world wars.
Like a poorly built home addition, there are gaps and cracks that tax experts exploit. Economic activity can be classified in many ways and taxed at different rates. A small business owner may file as an individual, a corporation or a partnership. Experts can suggest which path leads to the lowest tax.
Then there’s a legion of tax loopholes added to promote social change. To encourage homeownership, for example, those who itemize can deduct mortgage interest. To lower energy use, there are new tax credits for those who install more efficient heaters and coolers or windows and doors.
Ever wonder why there are so many big pickups on the road? Special tax rules allowed business owners to frontload vehicle depreciation, creating a loophole so large you could drive a Ford F-350 pickup through it. That tax break might undo the good from buying more energy-efficient appliances.
Simplifying the tax code would require us to wave goodbye to many well-loved tax breaks. When the tax code last got an overhaul in 2017, it started with a promise that we could file our taxes on one side of a postcard. That didn’t happen, but we did get lower taxes on income and estates.
Which leads to a bigger problem with our current system. Despite all its complexity, and all the frantic activity, our current tax system doesn’t collect as much as is spent by the government. Not even close.
Besides that, though, the system’s perfect, and there’s no need to change a thing.
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.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Our taxes have been very simple by design. We never owned a business, a boat, another house, RV, or a pool. We never owned non-conventional stocks/funds (K1 is needed).
After years of using others to do our taxes, I decided it couldn’t be too complicated.
About 15 years ago, I tested TT, H&R and a cheap software called TaxHawk. TH was the simplest and can do anything I wanted. I heard from others is can do most things too. TH does your Fed tax for free and charges $15 for the state tax. Filing is electronic too. You can be cheap and file your state by hand or maybe online in several states, but I think $15 is a fair price.
BTW, you can ask questions and get answers within a couple of hours.
It takes me about one hour to do it annually. I never got audited or asked to pay extra.
I have done my own taxes for many years. I build a spreadsheet every year for the 1040 and all the attachments, usually working from the previous year’s spreadsheet. It helps me understand what is most important in terms of financial impact, and also what is new about the tax forms for that year. (It also helps me document every single entry for the future.)
The capital gains and small business exhibits are difficult. In particular, the capital gains tax calculations are not intuitive, but are instead more like step-by-step surgery. The alternative minimum tax used to be the worst, since it really made you calculate your taxes separately twice in excruciating detail, and over the years, the AMT gobbled up the regular 1040 (until the Trump years’ tax reforms.) Those tax reforms (and my gradual move toward retirement) now have saved me from a lot of extra work.
I don’t spend time worrying over stuff that I know has little impact on my taxes, but I feel I have accurately benefitted from what the law allows. I read the guides for each form and attachment carefully. (I do make mistakes – more often in my spreadsheet formulas.)
I have actually found the IRS to be pretty good to work with, and have never had any gripes about how it treated me. (I don’t feel the same way about a few states.)
And for full disclosure, I am a retired lawyer with an MBA. I find it completely mind-boggling that the government can even hope that the average taxpayer can understand the tax laws and accurately fill out tax forms. (The government needs companies like TurboTax and the other automated tax form options – the system would collapse otherwise.)
And if one disagrees with something the IRS does (or more likely, your state), the procedural maze one has to navigate is daunting – and I am sure it penalizes the relatively poor and uneducated far more than it penalizes me, since they probably just give up and forfeit their rights.
Martin, I build a spreadsheet each year as well, including Form 1040 and the relevant supporting forms and worksheets. I use the drafts the IRS issues in late summer (have had to use the prior year’s forms for state taxes in some years).
The original motivation was to calculate how much of my IRA I could transfer to my Roth IRA in any given year without triggering IRMAA and other undesirable consequences. To that end, I have additional columns where I can change assumptions and do pro forma calculations. It also allows me to fine tune the final estimated tax payment in January. But, as you point out, the other benefits are a better understanding of the impact of financial decisions I might make, as well as changes in federal and state tax laws. That being said, I still use tax software to file the return, in case I missed anything.
For many filers with relatively simple returns, the IRS has all the data it needs to create a return and make it available to the that taxpayer. Ideally, a system like that would remove a lot of the individual stress, along with the filing mistakes people make. Of course, the tax software lobby would fight it unless the software providers could realize equivalent revenue from this kind of program.
https://www.pbs.org/newshour/show/dreading-taxes-countries-show-us-theres-another-way
Good article Greg.
For the first time, I received a letter in December 2023 from the IRS asking to meet with me in person to review my 2022 return. I scheduled the meeting, did a thorough review of my 2022 return, and then met with them a few weeks later.
They were most interested in authenticating me and confirming that it was my return. Otherwise, they did not discuss my return. I had a larger than normal refund, and I suspect that was what triggered the letter. They said they could take up to 180 days to approve my return or ask for a review.
IMO, this could be avoided if every citizen had an IRS pin. This would prevent a lot of the fraud that occurs every year when fraudsters use stolen SSN to file fraudulent returns before legitimate citizens can file.
I agree with the PIN, but the process of generating one every year needs to be a LOT simpler than it currently is. I had technical problems getting mine 2 years in a row, and while I was sorting them out I realized that a lot of people (like my elderly father) could never have managed to unsnarl the mess I was fixing. The onus needs to be on the IRS to get the PIN to the taxpayer, not the other way around!
As an international who is also a native born citizen of the US, I am sometimes struck by the sense we have in the US that we actually control how our government functions–as evidenced by the diversity of freely expressed opinions of how we ought to change things.
Since I have spent significant parts of my life living as a guest in other peoples’ countries, I tend not to believe I can influence government at all! Of course, the balanced truth must be at least slightly removed from that endpoint of the spectrum as well.
So when it comes to paying taxes, I’m glad they’re not higher–at least today, and I’m glad there aren’t more of them. When it comes to government benefits, I’m glad there are some and I try to enjoy them.
Regarding complexity of taxes, I’m just glad that I can figure them out as well as I can, and sad and sympathetic alongside those who have more difficulty. As far as all the letters from the IRS, @Greg, I ascribe those mostly to my attention-deficit disorder. Usually the governments (state and federal) are right and I’m wrong. Sometimes I can figure out what caused the discrepancy. I do the same for others I help with their taxes. And if the error is less than a couple hundred dollars, I just “let it go!” 🙂
To your point, this year I caught an error by our CPA tax preparer during final review. Saved us $500 in taxes not to mention an inaccurate filing. When my wife and I went to review and file our return with the head CPA, he asked me if I wanted a job. I replied TBNT-thanks but no thanks, I have better things to do with my time. 🙂
While I appreciate the well written and well reasoned article, the crux of the problem with our tax code is laid out in the paragraph referring to social engineering.
Recent examples include The Biden Administration dictating what kinds of appliances can be built and sold in the US. That, among dozens and dozens of like examples are NOT the purview of the Federal Government, just as the Supreme Court ruled recently on the imaginary “right to abortion.”
Unfortunately, since we are now in a position where there are more people eating from the federal trough, than contributing to it, I fear we are doomed.
I am old enough to have heard JFK’s inaugural speech live on TV. I would imagine he is spinning in this grave at Arlington, with what the party he led has done to our country. “Ask not what your country can do for you. Ask what you can do for your country!”
Today we have socially engineered ourselves into not even being able to define a woman and teaching our children that their genders are their choice.
The Constitution never authorized an income tax. Just like many other creations of politicians, it was created at the fiat of government, for the benefit of government, and not to benefit the general welfare of the people.
The US Tax Code is 2,652 pages long and contains approximately One Million Words. No reasonable person would expect anyone to be able to decipher something of that magnitude.
I’d discourage you from posting political commentary. HumbleDollar is focused on personal finance, and I’m anxious to keep it that way.
Agree Jonathan. And you are being tolerant allowing a comment with political opinion to be posted. Many blogs would not allow this.
Kudos to you Jonathan. Way to keep the guardrails up!
We created an Excel spreadsheet for medical expenses, matching Tax lines. We keep it up throughout the year and that part of doing taxes is a breeze. I would like the House to do better matching programs to taxes that pay for them and to also ensure that those who make more than the average money pay the same (at least) as public servants.
Is a tiered tax on every purchase a possible solution ? Maybe a business purchase rate and a personal purchase rate.
Good thoughts – I fully agree. Back in the day, I did my taxes by hand and then submitted paper copies to the IRS and the NC Department of Revenue. I made copies and saved them with all my various documents in case there were questions. Over time I started to use TurboTax as a standalone program that acted more-or-less like a spreadsheet. Now it’s a program on my computer that communicates with a web server for updates and communication with “experts”. I have stayed loyal to TurboTax, and as Dick Quinn mentioned it’s gotten easier to download and add financial data (except for our credit union) to the return. I always feel the process should be easier and the tax computation should be less obtuse.
Not trying to be political here – – – but the reason our current tax system doesn’t collect as much as is spent by the government is not the fault of “us taxpayers”. It’s due to the inability of lawmakers to be honest with themselves (and us) about income and outgo.
My understanding is that in many foreign countries since citizens’ income is already reported to the government, such as in the US, the government sends out a tax return with the form already filled out and is returned to the government only if corrections are made by the taxpayer.
If we greatly simplified our tax code, we could set up the same system here. I’d happy give up a lot of deductions in order to do so!
I paid taxes in the UK for a few years before moving to the US. Took me about ten minutes, as the government had already done most of the work. I was stunned (and not in a good way) by the complexity here. These days I pay an accountant to file, but I still have to spend time collecting the data. I resent having to spend the time when the tax code largely benefits fat cats and special interests.
Nice article Greg. Much o the complexity for the average person is that the tax code is used for many more purposes than to collect revenue. For many seniors of modest means, the state tax is far more complicated. That’s because states use the tax system to provide things like property tax relief, and medical benefits.
I’m not aware of the $10,000 limit in home mortgage interest deduction. I thought the limit was the interest on $750,000 of qualified loans. There is a $10,000 limit on the deductibility of State and Local taxes (SALT).
Some would say the $10,000 limit on home mortgage interest deduction was an attack on blue states since New York and California have some of the highest housing costs. My taxes went up substantially after losing that deduction. You’d have a hard time finding a house in my area for less than 1-2 million.
“The tax code is used for many more purposes than to collect revenue”. Tax preparers have to verify that dependents actually live with the tax payer, or that the tax payer really is the head of household. If he/she get it wrong they will face monetary penalties. Preparers also have to calculate the ACA healthcare subsidies, which can be relatively complex depending on circumstances.
Things will never change for the reasons described in Richard Quinn’s comments below.
Good catch on the mortgage interest. I tweaked the offending sentence.
Jus further evidence of the complexity! And thanks for the reference to the T.R Reid book. sounds like a good beach read.
Too complicated for sure, but there are too many stakeholders benefiting from the maze to fix it and gee, what would politicians do if they couldn’t hand out loopholes?
I must say though that once I consolidated all investments in one place and with the newer standard deduction, using TurboTax filing has been a breeze- an hour or less usually, most input which I could also avoid if I linked Fidelity to TurboTax.
I say no deductions, a modified flat tax and a VAT and be done with it. Tweak the percentages in both to cover spending and let citizens see immediately what is being spent on their behalf. 🤑
There have been calls to overhaul the Code for all of my adult memory, and I’m sure before that. I’m a fan of most schemes that propose a simpler system. But any interaction with government requires excessive paper production. My father was a school superintendent when the DOE was created. The burden of new paperwork required for compliance was so expensive he was never convinced the Department did any good.