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 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.
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 when 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, which 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 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, they may like the flat tax, but this other person, they need
that.
But tax breaks and deductions aren't the only reason that filing your returns every year is super
complicated. The tax system in the US 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.
And so, again, 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.
And in a system with graduated rates, that withholding may not be correct.
The way people earn money, 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.
And so there's are 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, a variety of tax breaks and other benefits.
People in the middle there 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.
Every year, taxpayers spend more than $200 on average to prepare and file their taxes.
And remember, that's on top of anything they may owe the government.
TurboTax, which is owned by Intuit, made over $3.1 billion from its consumer tax segment in fiscal year
2020, up 25% from two years earlier.
But there is one major headwind to this fast growing for profit tax prep sector.
The rise of no-fee online tax prep.
Now for years, TurboTax's parent company has warned that free government run tax services could pose a
big threat to its business model.
More than 20 states offer their own "freemium" filing portals to allow residents to prepare and
file state income taxes online at no cost.
And 70% of Americans are eligible to file their federal taxes for free online through IRS Free
File, a public private partnership between the IRS and a coalition of tax prep companies called the
Free File Alliance, which actually includes TurboTax.
So about 100 million people could be filing their taxes for free.
The program got its start in 2003, but a fraction of those eligible actually use it.
In 2020, only 4.2 million of the 100+ million eligible taxpayers obtained a free return filing
through the program. That was a nearly 50% increase from the previous year, but still a small fraction
of the total eligible taxpaying population.
The Treasury Inspector General for Tax Administration released an audit in 2020 to
understand why so few taxpayers actually use the Free File program.
This report estimates that more than 14 million taxpayers in processing year 2019 ended up paying
for tax prep software that they could have gotten for free.
So why are so few people actually taking advantage of this "freemium" model?
The audit blames the complexity of the program, a confusing design, a lack of taxpayer awareness and
inadequate oversight by the IRS.
Looking abroad, the process is even simpler in places like Belgium, Spain and Denmark, where all
residents have to do is check the government's math on their pre-populated returns.
I have graduate students from some European countries who literally check over their tax forms
on their cell phones and say, yes, yes, yes, a djustthis.
OK, done.
This YouTube video was posted by a taxpayer in Estonia.
He walks us through the entire process of filing his income tax return.
It is utterly captivating, if not totally baffling.
It takes him all of 2 minutes and 50 seconds.
So can we take any of these best practices from abroad in order to make paying taxes in the U.S.
easier? I mean, after President Trump's tax overhaul in 2017, now more than 87% of
taxpayers just take the standard deduction instead of itemizing their returns.
And for a whole lot of taxpayers, the government already knows your income because your employer
sends your W-2 and 1099 to the IRS.
So that means that on both the income and deduction side of things, the calculations are pretty
straightforward.
There have been proposals over time for the United States, the IRS, for example, to mail out
draft returns to taxpayers who are in straightforward situations.
The idea being, if you just have earned income from a job, maybe some interest income from a bank,
straightforward tax situation, the IRS could actually fill out the form for you and you could
check it over, make some adjustments, if needed, and then send it back in.
That's what's done in a number of other countries.
So remember Free File?
That program where Intuit and other for-profit companies teamed up with the IRS to offer free
filing. Well, that partnership had one big catch.
The IRS for almost 20 years promised not to offer a rival product.
That is up until it stopped making that promise in 2020 amid political and media backlash.
But industry heavyweights like Jackson Hewitt say that tax reform and simplification would be
welcomed news.
Tax simplification is always welcome.
I've often debated this with academics and philosophers to say, "Oh, you're the tax business.
You push tax complexity.
You are for a more complicated tax system." Nothing could be further from the truth for any real tax
professional. We like simple taxes that we can help taxpayers administer.
There'll always be tax business.
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