Why I Hate Filing My Taxes
I still haven’t finished my taxes, probably because it is the civic duty I hate the most. It isn’t the paying that bothers me. It is the process.
I hate that I have to give a private company $49.95 to help me perform a basic act of citizenship. I hate that I must sit in front of a computer for hours mindlessly typing in numbers. I hate that the Tax Code is an incomprehensible black box. The software asks for a number. I type it in. It appears on a form, and I, more or less, assume it is right. Mostly, I hate that the Tax Code is so damn complicated.
Just for fun, I asked the senior staff here at TPC how they did their taxes, and what their pet peeves are. It turns out that the Code is an exercise in total frustration even for some of the smartest tax lawyers and economists on the planet.
Most of us have thrown in the towel and use commercial software. One colleague even uses a paid preparer. Dan Halperin and Jeff Rohaly still do their returns by hand. It just goes to prove, I suppose, that tax prep is a snap as long as you are A) a Harvard law professor or B) a master tax modeler.
Len Burman, who uses commercial software, says his views on complexity are “not suitable for reprinting in a family-oriented blog.”
Eric Toder, who has had a long career at both the Treasury Department and the IRS, also uses commercial software. His least favorite situations: the immensely time-consuming reporting for a Schedule C, figuring estimated taxes, and everyone’s fave, the AMT.
As for me, I was driven to software by two forms: the foreign tax credit and, no surprise, the AMT. No matter how hard I try, I cannot make sense of either one.
In 2005, University of Michigan economist Joel Slemrod estimated that tax compliance cost individuals $85 billion annually. Two-thirds of that was for the time it took to keep records.
Eric and coauthors came up with the same depressing result. They figured the average taxpayer in 2000 spent 26.4 hours preparing a return. I don’t know about you, but taking the equivilant of a-day-year to do this seems, shall we say, wrong. Plus, we spend an average of $150 out pocket. At $20-an-hour for our labor, that’s almost $800 in time and money, or roughly the same as President Obama’s tax rebates. So that’s where the stimulus is going.
There once was a time when I was terrified about making a mistake on my return. But I came to learn that when it comes to taxes, there are no right answers. I once asked a big accounting firm to design a couple of sample returns and calculate the tax liability for each. I then gave the data to 3 preparers and ran it through 3 commercial programs. You won’t be surprised to learn I got 14 different results.
So, we spend a day a year preparing returns and, in the end, have no idea whether we got it right or not. Is it any wonder why Americans hate taxes?
Since software can be designed using many different programming languages and in many different operating systems and operating environments, software standard is needed so that different software can understand and exchange information between each other. For instance, an email sent from a Microsoft Outlook should be readable from Yahoo! Mail and vice versa.
Whois
I wonder if the use of tax software actually increased the complexity of the tax code. Perhaps the fact that AMT was reaching a large swatch of the population would been addressed sooner if everyone was required to hire an accountant rather than buy a $50 program to figure it out.
I feel like that 26-hours-for-tax-prep number has been around for a while, but as computers allowed us to do more complex math in that time, complexity increased.
How close has the increasing complexity of filing taxes tracked the increasing use/availability of tax software? When it is so easy to plug #'s into a program and get an answer, is there any way to dial this back?
I spent four hours last night on a very complicated return. It really wasn't that bad, even though I had to download and read instructions on Health Savings Accounts and on early withdrawls from IRAs, not to mention daycare. I would much rather be in control of how this information is completed than letting a computer do it. I would rather argue with an IRS auditor than the software.
My problem is not understanding the form, but instead actually coming up with four large for underwithholding in the Spring of last year.
People who say paying is not the problem likely don't owe interest and penalties.
The silly part is that I could get myself into this mess in the first place. If my employers filed business income taxes instead and passed on the deductions in my pay, I would not have had to go through this exercise, nor would I be further in debt to the United States than I already am for student loans.
Howard –
I completely agree with your point. Why there needs to be an industry — a real industry, not just a cottage industry of useful accountants — that has sprung up around the personal income tax makes no sense at all. Tax lobbyists are sure to point out that every line on our tax return, and every form we need to file, is based either on a particular issue or a particular constituency. And now the entire tax-filing public gets to pay the price in professional services and personal time. Since your post is centered on the preparatin and filing of personal income taxes, I'm one of those folks who prepare and file a paper return. I would happily file electronically, but why, oh why, do I need to use some commercial third party source to do that. I resent the idea that essential government functions such as the collection of tax payments are supposed to be farmed out to the profit-seeking corners of the private sector.
The only truly hard part about taxes is figuring out your net income if you have a business or a large number of asset sales. Otherwise it's quite simple.
Ten years ago I built my own tax computation software using Excel. I keep it up to date, and I can predict my state and federal tax liabilities to within $10 if my income estimates are accurate. The Excel file even graphs marginal tax rate and AMT versus income for any tax year I choose, from 2001 to 2010.
However I still use TaxCut to prepare my tax returns, because it saves me time and because it sometimes catches an error.
Now it's true that today's tax code uses phase-outs and such to obscure the true marginal tax rates. Tax software allows us to pull back the curtain and reveal the marginal rate in just a few minutes:
1. Write down your state and federal tax liabilities, or merely your tax due/refund amounts.
2. Add $1000 to your income as “other income”
3. Repeat step 1.
4. Subtract the step 1 results from the step 3 results. This is how many dollars the federal and state tax liability increased due to the $1000 additional income.
5. Divide the results by 10 and you have your federal and state tax brackets, respectively, in percent.
I can practically guarantee you that your actual federal bracket will not match any of the statutory tax rates (10%, 15%, 25%, etc.). If you closely compare your Form 1040 for Step 3 and Step 1, you will see exactly where the phaseouts or AMT have nailed you.
I feel your pain, too, of course. But the real reason most American hate paying taxes is because the GOP has conditioned them over 30 years to think that taxes are un-American since all the money goes to foreign aid, waste, fraud and abuse and Lexus-driving welfare queens. Until we change that attitude, we're in big trouble.