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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.
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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.