Here’s a headache-inducing situation:
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A client called the other day wondering if she could claim her daughter June as a dependent because she provided more than 50% of June’s support. However, June wants to file her own tax return and claim her son (the client’s grandson) Nathan as a dependent because although he worked part time, he was in college and June funded his tuition, books, and board from a college fund that she owned and controlled after the divorce. Consequently, June feels that she provided more than 50% of Nathan’s support.
Well, let’s sort through the 75,000 pages of tax code and see if we can figure this out.
Ridiculous, right? Here’s the truly scary part: it’s just one of many realistic tax situations thanks to our nation’s confusing tax code.
Our tax system has become so complicated that many tax professionals are now specializing in specific tax segments. Some prefer to only prepare trust and estate tax returns, some specialize in real estate, others in small business returns and then there are the pros that cater to those who only have W2s and very simple tax returns.
In 1986, the tax code was overhauled and simplified—and I think they did a pretty good job. They dumped a bunch of loopholes and trimmed down the plethora of tax rates to only three. The pundits predicted that many more people would be preparing their own taxes and there would be a significant drop in the need for a tax professional. Hah! There was no significant drop in need whatsoever. In fact, my client base increased because, truth be told, taxes did not get easier. Simply put, tax law is murky--there is always that gray area that must be judged or legislated further. And the 1986 act created a lot of confusion for the layman.
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As the years went by, lawmakers added more twists and turns to the tax code to either clarify existing law or to create more law – mostly to satisfy special interest groups.
Each new president promises tax simplification. Proposals fly for a flat tax, a consumption tax, a fair tax—and they’ve all died sad little deaths in Congress.
I have to laugh when I see commercials on television during tax season that basically say that if you can answer all the simple questions asked by a particular tax software then you can do your own taxes. For many that may be true, for instance, if all you’ve got is a W2 and maybe some itemized deductions. After all, if you have a splinter, you don’t need a doctor right? You can certainly sterilize a needle and extract it from your finger. But if you have a brain tumor, just because you know how to slice with a knife doesn’t mean you should do your own brain surgery. You might want to get a professional.
So it is with taxes. For example, if you’re self-employed, tax law gets even more complicated. A tax professional can usually save you more in taxes than the preparation fee. Taxes are not simple, and the IRS loves to audit complicated self-prepared tax returns.
Last night I heard a TV commentator say that the tax preparation industry does not want tax simplification because we’ll lose business. You’ve got to be kidding. I know tax professionals who drop out of the industry every year because they are drowning in frustration at all the new complexities.
A couple of weeks ago, I attended a tax seminar that focused on a federal update. I spent eight hours learning about the changes that were reflected in a handout manual that measures one-inch thick. The two new taxes have been added to the code contain so many “what if” and “if, then” statements that it’s mind boggling. Then there is all the complexity created by the Affordable Care Act. And don’t forget all the tiny changes to mileage rates and IRA contributions and dependency exemptions that change every year.