Across the nation, Americans dig way down deep for our record-breaking income tax collection. It’s hard to relax with those tax forms on your mind, but don’t give up.
That is easier said than done. Filing taxes seems almost painful by design here in the U.S.
If you look at the many, many lines on the tax code, they’re just a plethora of forms and additional attachments that you may have to make. It’s an incredibly complicated code.
It’s over seven million words long. The IRS estimates the average taxpayer spends 12 hours working on it and ends up paying an average of $230 to get their paperwork filed.
Your tax return is in no way that simple. I don’t care who you are or what economic situation you’re in.
Now for some of us, it is the largest single financial transaction that we make each and every year. Just take my case.
I work for a company that’s based in New Jersey, but I live in New York and in Manhattan specifically. So I have to pay federal income tax, state income tax for both New Jersey and New York, plus the city income tax for Manhattan.
That is a whole lot of paperwork. But tax experts say that all those forms and schedules are actually designed to help us save money, if the filer knows how to navigate the tax code.
Navigating the Complex Tax Code
We have 70,000 pages of rules and we have a deduction or credit for everything under the sun. If you have the knowledge about how it works, you can utilize the tax code to benefit you more in the long run.
However, most people don’t have that knowledge, and I think that is what creates this fear of the IRS and paying taxes. Essentially, the tax code is not there to harm anyone.
So how did the tax code get to be so complicated? And is it really a good thing for the taxpayer?
When I get my paycheck every other week, I get a line-by-line list of all the money that’s automatically being taken out, including what’s being withheld for federal, state, and city income tax.
This begs the question, what exactly am I doing when I file my taxes every year if all this tax has already been taken out of my pay?
The process that we go through every spring is to reconcile what we owe, according to the tax code, with what we’ve already paid in through withholding, usually, for most people.
But it’s a complex process because there’s oftentimes a mismatch between what we’ve already paid in and what it is that we owe.
Instead of handing out direct checks to people who need help, Congress runs a large number of social policies and benefits through the tax code itself.
That means that, theoretically, you can substantially reduce the amount of tax you have to pay by claiming certain deductions, credits, and expenses on your tax return.
We have a lot more freedom here where the tax codes are up to you to utilize to your favor. On the IRS website, they explicitly state that you can use the code to benefit you as much as you can.
You have a full year to thoroughly and effectively tax plan to make sure that your money is being spent in places where you are growing it, but at the same time, reducing your tax liability.
Some argue that having to itemize and identify all these one-off deductions is an unnecessary hassle, while others think it’s key to leveling the playing field.
The Challenges and Politics of Taxation
The price of unfairness is simplicity. When people talk about the flat tax or just do the one-rate tax, that may be great for somebody.
But somebody with three children who’s unmarried, who needs the earned income credit and the child tax credit and the dependent care credit, those are complicated. The person over here with just one W-2 may like the flat tax, but this other person, they need that.
Tax breaks and deductions aren’t the only reason that filing your returns every year is super complicated. The tax system in the U.S. is incredibly complex for a number of different reasons.
We tax households instead of individuals. Another common thing that comes up is that many people have more than one job.
Unless you have made adjustments, your second job, let’s say you have a side gig, the withholding is not being done as if that’s your second job. It may be being done as if it’s your first job.
In a system with graduated rates, that withholding may not be correct. The way people earn money is also not always totally straightforward.
The reason why the U.S. tax system can seem complex is because individuals can earn income through different types of ways. We can earn portfolio income, which is going to be income earned through trading stocks and bonds.
We can earn income passively, which can be created through things like real estate investing. And then we can also have our income from what we earn.
The tax system can seem complex if you have income in these different categories. And then there’s politics.
Remember, income tax goes back to the 16th Amendment in 1913, and since then a whole lot of presidents have rolled out their own changes and overhauls to the tax code. Traditionally, every time a new president is signed on, they have a tax reform policy that they’re going to put into place.
But it’s not like they can always totally erase what came before them. Instead, politicians tend to layer on top of what’s already there.
Something that provides political rewards for members of Congress. If you can help out some economic sector, say that’s important in your district or state, that could be a political benefit that redounds to you.
So there’s a lot of incentive for Congress to add more tax breaks. Experts say that this is part of why the tax code keeps getting longer with all of these increasingly complex provisions that don’t appear to have any sort of overall logic.
The first reason why our taxes are so complicated is because they never seem to go away. Even though we all want tax simplification.
Nowadays, figuring out which forms and schedules you need to fill out isn’t exactly the easiest thing to do by hand. I could do my taxes by hand, but it would be very difficult to do that, and hardly anyone does that anymore.
Do you want to be your own accountant? Are you going to take time and research the tax code?
Are you going to take time to research tax credits? So most people, they do not want to do that.
This kind of attitude has been great for companies in the nearly $11 billion business of tax preparation services. H&R Block, TurboTax, and Jackson Hewitt are some of the biggest players in the tax prep software space.
Our role is really to help all taxpayers understand the tax laws and apply them to themselves so they can pay the minimal amount of tax burden that they owe. I don’t care who you are or what economic situation you’re in, high, medium, low, low-income, unemployed.
You’ve got a complicated tax profile, as low-income taxpayers qualify for a variety of tax benefits. High-income people get a variety of tax breaks and other benefits.
People in the middle are on the phase-out, they may qualify or they may not qualify. But hiring help, whether it’s an accountant or tax prep software, doesn’t always come cheap.