I do a lot of radio and other interviews this time of year and inevitably I’m asked why doing your taxes is so complicated. My answer is predictable, “The Tax Code is too complicated.”
Of course, that’s easy to say. And the proof is easy to find.
The National Taxpayer Advocate Nina E. Olson agrees, noting in her 2012 annual report:
The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns. It obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply.
Olson went on to explain that taxpayers spend a total of six billion hours each year trying to comply with federal tax filing requirements. That’s the equivalent of 8,758 lifetimes.
According to the IRS’ own instructions for the form 1040 (downloads as a pdf), the average burden for taxpayers filing a federal form 1040 is about 16 hours and $260; those numbers shrink to about 5 hours and $40 for taxpayers filing a federal form 1040EZ. You can expect to spend 8 hours and $80 for a form 1040A – the form 1040A is sort of a hybrid return between the 1040 and the 1040EZ.
The worst part? Compliance requirements aren’t slowing down – they’re ramping up. This year alone, we had two new pieces to deal with: Obamacare regulations (penalties and credits) and new FATCA (Foreign Account Tax Compliance Act) reporting requirements. And don’t even get my colleague, Peter J. Reilly, started on the confusion surrounding those form 3115 reporting issues…
While most of you aren’t struggling with a form 3115 or a 8965, many of you are spending a considerable amount of time figuring out a constantly changing Schedule A to claim itemized deductions. Statistically, about one in three taxpayers claim the itemized deduction. That number will likely dip as the floor for claiming medical expenses increases, deductions are capped for higher income taxpayers and other provisions are tweaked. Eliminating the itemized deduction would, in theory, make preparing a return more simple.
The alternative to the itemized deduction is the standard deduction, which is what most taxpayers claim on their return. Those numbers for 2014 and 2015 are here:
Eliminating the itemized deduction would mean that all taxpayers would be limited to the standard deduction – no Schedule A required.
So I’m throwing it out to you. Today’s Fix the Tax Code Friday question is:
Should Congress do away with itemized deductions? Why or why not?
