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No end to tax code complexity

By Kay Bell · Bankrate.com
Thursday, January 10, 2013
Posted: 6 pm ET

You're feeling overwhelmed, right? I'm sorry to tell you that things aren't going to get any better in 2013, especially when it comes to taxes.

Although the delay of the tax-filing season until Jan. 30 offers us a bit of a breather -- unwelcome, however, by those who want to get their returns in so they can get their refunds -- the tax code itself is not getting any easier.

Sure, the American Taxpayer Relief Act of 2012 made things a little less taxing for some us by making many laws permanent. Key among these now fixed laws is the section dealing with the alternative minimum tax. That's particularly welcome for tax planning and filing purposes.

But the new tax act also mucked things up by adding a variety of income thresholds that taxpayers will have to consider. There are, of course, the limits of $400,000 for singles and $450,000 for married couples filing jointly where the top 39.6 percent income tax rate kicks in this year.

Then there are the income levels at which some taxpayers will lose some of the value of their itemized deductions and their personal exemption amounts. That will happen once a single taxpayer's adjusted gross income exceeds $250,000; the earning thresholds for head-of-household filers and married filing jointly taxpayers are, respectively, $275,000 and $300,000.

And we can't forget the two new taxes that go into effect this year as part of health reform.

An added 0.9 percent Medicare withholding tax will be collected from the paychecks of taxpayers who, as single or head-of-household filers, make more than $200,000. Married jointly filing taxpayers will see this added amount come out of their pay if they make more than $250,000.

Then when taxpayers earning more than those amounts pay their 2013 taxes, any investment income they have will be subject to a 3.8 percent surtax. This is referred to as the Medicare investment tax because the added tax money on investment income goes to the trust fund for the federal medical insurance program for the elderly.

So when it comes time to figure 2013 taxes, many filers will have to deal with more, and confusing, tax laws.

It's things like this that prompted the Internal Revenue Service's own independent watchdog, National Taxpayer Advocate Nina Olson, to declare in her 2012 annual report to Congress released this week that tax complexity is the most serious problem facing taxpayers.

In coming to that conclusion, Olson cited data collected by her office showing that it takes U.S. taxpayers, both individuals and businesses,  more than 6.1 billion hours to complete filings required by a tax code that contains almost 4 million words and that, on average, has more than one new provision added to it daily.

And remember, Olson's figures were calculated before the American Taxpayer Relief Act was enacted.

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3 Comments
Frank
January 11, 2013 at 6:21 pm

Hi Kay Bell,

If I've won a $4 million house and kept it. Paid federal and state taxes on it. If I sell it after lving in it for 2.5 years, what will be my tax bill?

Regards,
Frank

Todd
January 10, 2013 at 11:56 pm

Im not sure people want tax simplicity. I'm for it but let's say we do make it simpler. No deductions, just a basic rate schedule for everyone. What happens...

No large returns.
How many accountants/tax specialists are out of jobs ? 40%? More?
How many IRS workers are it of a job?
No mortgage deductions
No EIC
No Cap gains
No college savings accounts
Just a basic tax schedule

I think many people actually enjoy trying to figure it how to game the system, maybe not, but if you it to a vote, I doubt you'd actually get true support for a basic tax system.