Shortly after signing the Constitution, Ben Franklin was quoted as saying, “In this world nothing can be said to be certain, except death and taxes.” We all acknowledge this fact and faithfully pay our taxes each year—but unfortunately, as many as 44% of Americans are bothered by how complicated taxes are to complete.
Why are taxes so complicated?
There are several reasons—both historical and ongoing—that explain the complexity, and those reasons are helpful for every taxpayer to know. Armed with this knowledge, you can begin to approach tax season more confidently.
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Why are taxes so complicated?
Tax changes are often driven by presidential administrations, even though Congress is the only body that can make changes to the tax code. Additionally, lobbyists and special interest groups push for changes to the code that support their causes. These changes are often used to drive certain agendas, for better or for worse.
Tax changes often take place faster than the average taxpayer can track. Recent U.S. presidents have all driven major changes to the tax code that went into effect in 2016 and 2018. And during COVID, even more major tax changes took place. Ultimately, taxes are so complicated because nobody simplifies the tax code—they just add to it.
The Good And Bad Of Tax Code Changes
Several other contributing factors have led the tax code to its current level of complexity. First, an enormous number of rules and regulations need to be followed by the IRS in applying tax code each year. Some are obvious, but some are obscure.
Second, sunset tax law changes may roll into effect (or out of effect) at any time. Whenever Congress puts a new tax code into effect, it can include an automatic expiration date, at which point it will roll off the tax code—just like the current Tax Cuts and Jobs Act (TCJA), which may very well expire soon. At this expiration date, the current administration can keep those laws in place or try to change them. Either way, nothing is permanent.
On the bright side, changes to the tax code can also stimulate the economy. During COVID, U.S. taxpayers received cash stimulus payments to buoy the economy—these payments were not taxed, but they were, in effect, a type of tax credit. And in the past, presidents have instituted social security tax holidays, allowing employers to give their employees larger paychecks by temporarily suspending the employee portion of social security tax.
There are also several reasons why your personal taxes may have become more complicated over time. Your income level may have changed; if the amount or source of your income has evolved, that may result in different tax brackets or deductible items. If you own a business, your tax needs may regularly fluctuate. Your taxes depend on what type of business you own—while some income may flow through to personal taxes, some may be taxed on a corporate level.
You may also be subject to multiple types of taxes you didn’t quite expect. You’ll always have to contend with state, federal, social security and Medicare taxes, but you may also have to pay capital gains tax, net investment income tax, alternative minimum tax or a gift tax (if you give someone a large sum of money). These tax types may come and go or the rate may change based on the amount of income you earn. Deductions—such as IRA contributions, medical expenses, charitable contributions, real estate losses and many others—are also affected by how high your income or adjusted gross income is.
Why It’s Important To Learn Tax Code
Whether you feel in control of your taxes or you need help to complete them each year, remember: taxes matter. They can affect your financial health significantly, either reducing your wealth or increasing it depending on your tax strategy. You shouldn’t let tax decisions drive every financial decision you make, but you also shouldn’t ignore the effect that taxes can have on your financial ventures. For example: if you retire at age 62 and have not yet started taking Social Security, you may be able to withdraw IRA assets at a low tax rate or recognize capital gains and pay 0% tax on assets used to fund living expenses.
The most important thing to do if you have tax questions is to talk to your CPA. Curio Wealth’s holistic approach to financial health means that we’re always thinking about the tax implications of your financial choices. So to ensure your taxes are much less complicated, give your advisor a call. They’re well-equipped to answer your questions and point you to any necessary tax professionals.
