I Despise the USA Tax System SO Much

[RebelwoaCloo]

My 2 Sense' Worth.

A flat tax of 15-20% total income would allow most of us make more money thus increasing our taxes and not spending our free time trying to figure out the ever-changing tax laws to save money. D'oh.

 

[FDC319]

You're right about the lack of a one time penalty. It used to be 6% of the excess contribution per year as long as it remained an excess contribution, which is usually enough of a penalty to cause people to remove it.

I think there is a way to carry it forward and treat it as though it was a 2021 Roth contribution, but that would probably involve the 6% excess penalty for 2019 and 2020, so probably not worth it.

If you recharacterize, the nice thing is you don't have to worry about the excess earnings. The drawback is if you're not entitled to the IRA deduction on your taxes, then you have basis in your traditional IRA. Having an IRA with basis is a multiyear record keeping issue that I choose to avoid. The other option is to do the recharacterization, take whatever tax deduction you can get, and forget about the basis. You'll pay slightly more taxes when you take money out of the traditional IRA many years from now, but you won't have to bother with the accounting.

Might not be any need to amend the return, but simply file form 8606 instead.

If FDC319 wanted to take the deduction for their 2019 traditional IRA contribution, Form 8606 would not be sufficient. This would also be true of the retirement savings contribution credit, although I suspect FDC319's income is probably too high for that.

I'm not sure if FDC319 would have to file an 8606 with the amended 2019 return - they may need to do so. FDC319, check the instructions for Form 8606.

Thanks all. Not eligible to deduct. Being single hurts me a lot for tax purposes.

Unless my custodian does it for me, I am definitely not interested in multi year record keeping. I'll risk paying a bit more to avoid that.

The funny thing is I shifted my investments around and deliberately took some gains in order to make it more tax efficient in retirement starting next year. I obviously missed something. Live and learn, one tax year at a time.

 

[Offgrid Organic Farmer]

The tax system rewards those who diligently study the rules. Since 1977, I have always prepared my own tax returns and have never had a problem.

I agree.

Dont play monopoly without reading the rules.

It is the same with income taxes.

2017 was the first year that we hired an accountant to do our taxes. We had just formed an LLC and put our properties into the LLC, we are familiar with how to fill out a 1040 with all the schedules and depreciation, etc. But we were not comfortable doing it as an LLC.

I have been retired for 19 years, I knew that eventually, we would need to shift over to using an accountant. But I still prefer to do them ourselves.

 

[SevenUp]

Thanks all. Not eligible to deduct. Being single hurts me a lot for tax purposes.

Unless my custodian does it for me, I am definitely not interested in multi year record keeping. I'll risk paying a bit more to avoid that.

If your pre-tax IRA balance is small (even better, zero), the Backdoor Roth process might interest you.

 

[ERD50]

The tax system rewards those who diligently study the rules. Since 1977, I have always prepared my own tax returns and have never had a problem. ...

That's no justification for the senseless complexity of our tax system.

That's a bit like saying it's OK that the city hasn't fixed the potholes, the diligent driver has memorized where they are and will swerve to avoid them.

...

It may be too late for some, but this post identifies many of the income limits and thresholds for 2020. You may find it helpful.

https://www.early-retirement.org/forums/f28/the-important-trigger-income-levels-2020-a-101090.html

Given that the system is what it is, that is a very useful thread. Nice work.

-ERD50

 

[ERD50]

IMO it's criminal how complex our tax codes are, thanks to politicians & special interests meddling. There is no reason it couldn't be a lot easier. It should be possible for the average citizen to understand and file their own taxes, but I doubt many can.

Yes. I find it a bit hypocritical that our system of laws say that ignorance of the law is no excuse, but then come up with these very complex laws/regulations. If the common person is expected to understand all this, it ought to be easily understandable by the common person, who has other things going on in his life.

I'd also adjust your line: "IMO it's criminal how complex our tax codes are, thanks to politicians & politicians giving in to special interests." Special interests can't meddle w/o the politicians, at least the last time I checked the Constitution.

Actually, what I want to do is send you a check in the mail for your bio diesel mixture. Removing ANY type of incentives from the tax code. Let tax be tax, and incentives be incentives.

As another example, forget the mortgage interest deduction. If the govt still wants to give an incentive for homebuying, then they just send you a check for $300 every month.

I realize I'm probably creating a Department of Incentives or something. AND that it would probably be just as complex as the tax code. But I would still do it.

Agreed. If the incentives are agreed to, then do it outside the tax code. Another example, I got a new furnace/AC and some replacement windows, all with tax energy credits. Why should 99% of the taxpayers who did not buy those things have to click through page after page of "did you do x,y,z this year"? I'm always afraid I'm going to click through something that I should be paying attention to.

The people who sell items with a tax credit know it, it's part of the sales pitch. So just give the new furnace owner a form to fill out for the rebate. No reason to make it part of the tax code that everyone sees. And if they really want to tie it into income levels, fine, just ask for the info from last year's 1040.

-ERD50

 

[USGrant1962]

My perfect tax system would be a flat personal income tax from the first dollar and a flat corporate gross receipts tax. Go ahead and roll SS/medicare into the income tax rate, no "payroll tax" on corporations - that just hides taxes from the employee/voter. Simple as can be, doesn't hide cost of government from ~40% of the voters, and doesn't penalize winners and subsidize losers in business. I'm OK with a graduated tax bracket or two for the income tax.

But that wouldn't give the politicians much to do. Oh, another benefit!

The rates required are left as an exercise for the student.

 

[HI Bill]

That's no justification for the senseless complexity of our tax system.

That's a bit like saying it's OK that the city hasn't fixed the potholes, the diligent driver has memorized where they are and will swerve to avoid them.
-ERD50

If the size, shape, depth, and distribution of potholes didn't change every year, I'd agree with you. Just ask those with really big mortgages how they feel about recent tax law changes that limited their mortgage interest deductions, years after they bought a residence with certain assumptions. There's a reason that tax preparation professionals go to Vegas every year for an annual tax conference to learn the changes (it's not just for the gambling).

 

[Offgrid Organic Farmer]

My perfect tax system would be a flat personal income tax from the first dollar and a flat corporate gross receipts tax. Go ahead and roll SS/medicare into the income tax rate, no "payroll tax" on corporations - that just hides taxes from the employee/voter. Simple as can be.

Sounds good for the wage-slaves.

I am not saying the poor. But those whose mindset has been held in their slavery.

Even as a young junior sailor in the US Navy, I was surrounded by other sailors. Our take-home pay was known to all and easily determined from one glance at the rank you had on your sleeve.

But I also owned a Five-plex apartment building, and my wife was running a laundry service with five employees.

If your only source of income is a paycheck then taxes are simple. Just use the EZ form and pay the highest rate possible.

The same person could be getting his paycheck and investing or operating a business activity. How much I made was determined by my bookkeeping methods. Every business has write-offs.

 

[Carple Tunnal]

It is so complex, when there is a rule change, people can't even agree whether it was the rich or the poor who got the most benefit. Tax structure should be tied to the government budget, so that if spending goes up, taxes go up for everyone accordingly to cover the increase. That will help people understand what it means to change government spending or tax rules. The way it is now, most people have little choice to believe whatever, possibly inaccurate, information they are told about the budget.

Following the tax forms is very similar to stepping through a computer program, and there is no excuse for the IRS being unable/unwilling to make a website emulate those forms without involving a third party, such as Free Fillable Forms, that gets my personal information.

However, not all forms follow step by step in a logical order. For example, it used to be (maybe still is) that Line 45 (AMT) could not be completed until Line 49 (Foreign tax withheld) was done first.

 

[RobbieB]

I don't "click through" stuff with Turbo Tax, I select what to work on. When I did the furnace / AC and the solar I went looking for those items.

Clicking through stuff is for first or second timers.

 

[Offgrid Organic Farmer]

It is so complex, when there is a rule change, people can't even agree whether it was the rich or the poor who got the most benefit. Tax structure should be tied to the government budget, so that if spending goes up, taxes go up for everyone accordingly to cover the increase. ...

Beware of the fallacy that individual income taxes are somehow tied to governmental spending.

From 1776 all the way to 1935 the common man was not taxed on his income. The government had not yet developed this form of controlling the masses.

 

[ut2sua]

The US tax code is mostly random, exceptions to rules are the norm, there are exceptions within the exceptions. One can not out do the current tax code if the goal is to confuse the heck out of people. And to make sure no one is ever up to date, we add/change the code every year. If one's goal is to use something like TT and pay whatever the program tells you to pay at the end of the year, it is not that bad. If one's goal is to understand what are the tax consequences and the how/what/when to take certain actions, it takes the equivalent of 3 PhD degrees to be on top of things. Keeping in mind that programs such as TT were not an integrate part of the tax code. The original idea was: each and every citizen will be able to do the tax with a pencil and paper forms. When it comes to something as widely applicable to millions of families such as the AMT (Alternative minimum tax), even a program such as TT basically said that it is too complicate to explain if you want to understand the rules (that was a few years ago, the tax code seemed to be simplified in the past few years regarding AMT).

 

[target2019]

I appreciate that the US tax code creates opportunities for preparers and software companies.

If you've self prepared for a number of years then you persevere each year and get it done.

 

[DrRoy]

Have not had a problem using tax programs. Have sold equities as part of spending $ in RE but never triggered AMT.

 

[Badger]

I have to do standard deduction so tax prep is not too difficult. I do them long hand at home before I take them to AARP for free tax work, confirmation of my results, and electronic filing. For the past 8-9 years it has worked well and the results pretty much match.




Cheers!

 

[sengsational]

Retroactivity

One thing, they should not be able to change the rules after the fact. IOW, the rules for 2020 taxes would be locked in on 1/1/2020.

I'm a fan of having an ongoing tax obligation calculated using estimates for things (most taxable events can be estimated). The complexity means that those who spend more time (actually, gain a higher understanding, so time and intelligence), have a better chance to pay a little less. Which translates to "tax those unwilling/unable to figure it out". But the tax code itself has built-in protections for some groups so knowing the details offers no benefit. But people who find themselves with savings probably can help themselves if they know the ropes.

 

[ERD50]

One thing, they should not be able to change the rules after the fact. IOW, the rules for 2020 taxes would be locked in on 1/1/2020....

YES!!!

And all the forms should be finalized on 1/1/2020 for tax year 2020. This would allow the tax prep companies to be more efficient and probably have fewer errors in their programs.

And it would allow me to do my taxes as I go, and know almost exactly how much I can apply to certain categories, like Roth Conversions, capital gains/losses etc.

-ERD50

 

[CRLLS]

My perfect tax system would be a flat personal income tax from the first dollar and a flat corporate gross receipts tax. Go ahead and roll SS/medicare into the income tax rate, no "payroll tax" on corporations - that just hides taxes from the employee/voter. Simple as can be, doesn't hide cost of government from ~40% of the voters, and doesn't penalize winners and subsidize losers in business. I'm OK with a graduated tax bracket or two for the income tax.

But that wouldn't give the politicians much to do. Oh, another benefit!

The rates required are left as an exercise for the student.

I have been a fan of a flat tax for quite a while. Everyone has responsibility for running our government and should pay taxes. For those who need assistance, let them apply for and receive that assistance according to the laws at the time. I also agree that companies should pay based on their gross income, not adjusted income, just like the citizens would.

Let the government decide how to use the general fund for their chosen social programs (like home ownership, solar panels, electric cars.....) within their budgets and their available tax income.

 

[scrabbler1]

YES!!!

And all the forms should be finalized on 1/1/2020 for tax year 2020. This would allow the tax prep companies to be more efficient and probably have fewer errors in their programs.

And it would allow me to do my taxes as I go, and know almost exactly how much I can apply to certain categories, like Roth Conversions, capital gains/losses etc.

-ERD50

I would agree with the rules, but not the forms. The forms should wait until at least the previous tax filing season is over, so the 2019 forms would not have to be finalized until the 2018 filing season is over in April, 2019. This way, if there are problems with the forms (think about how awful the 2018 forms were, and the many complaints including mine about them), they were able to be fixed in time for the next filing season.

 

[ERD50]

I would agree with the rules, but not the forms. The forms should wait until at least the previous tax filing season is over, so the 2019 forms would not have to be finalized until the 2018 filing season is over in April, 2019. This way, if there are problems with the forms (think about how awful the 2018 forms were, and the many complaints including mine about them), they were able to be fixed in time for the next filing season.

The forms should be right from the get go. If they need a month to do that, then tell Congress no changes after end of Nov, so forms can be online Jan 1.

People seem awfully willing to cut these people slack when this is their job. It's a big and important job that affects nearly every citizen, they should be expected to get it right.

-ERD50

 

[Bryan Barnfellow]

It might be of interest to see how it works in another country; in this case my adopted country, Switzerland.

The Swiss system seems to be a lot less complex both in structure and in execution. With respect to the latter, on the annual tax "declaration" you fill in the relevant information about your income and proposed deductions, and send it in. You don't calculate your tax. The tax offices (federal, canton, and your own town/city) each send you a detailed tax statement, showing what you owe and why. You have 30 days to dispute any part of it; otherwise, after that you are sent a bill to pay (well, actually three bills). These take into account amounts you prepaid during the year either quarterly or through payroll deduction.

Because the system is not overly complex, I am able to calculate my expected tax from year to year within a fairly close tolerance.

That said, as a US citizen I am taxed whether I live in the US or not. So, I also have to make quarterly estimated payments and then send in my US tax return and deal with its complexities along with the intersecting complexities of what I am allowed to count in Swiss taxes as offsets against my US tax bill. Those calcs can be mind bending and are based on interpretations of US tax treaties with other countries (in my case, Switzerland).

In theory I should be able to deduct all of my Swiss taxes against my US ones for the same income. In reality, I always end up paying about 7% still in US tax, plus my regular Swiss tax. The two tax bills together exceed what I would have paid in US taxes alone, had I not moved to Switzerland.

The good thing about the US system is that it is generally quite swift. In Switzerland, one can wait up to 12 months to get your tax bill(s) (what you owe above and beyond what you have paid in advance) from any given year. So, you always need to hold in reserve some funds for those eventual bills. A good thing about the Swiss system is that they do not tax capital gains.

-BB

 

[FireFool]

The tax system rewards those who diligently study the rules. Since 1977, I have always prepared my own tax returns and have never had a problem.

It may be too late for some, but this post identifies many of the income limits and thresholds for 2020. You may find it helpful.

https://www.early-retirement.org/forums/f28/the-important-trigger-income-levels-2020-a-101090.html

I didn't retire based upon a desire to study tax codes to optimize my finances. When I was working I was too busy doing my job and living life with a family to spend the time to delve into the intricacies of tax laws. I know even today that I am not tax optimizing my withdrawals. At least near term I self-rationalize that one of the benefits of being FatFired is that I can afford the sub-optimization that's occurring with my taxes - but I'll admit it burns me a bit knowing that there's ways to reduce my and my heirs taxes that others are taking advantage of that I'm not due to the complexities of flushing those opportunities out.

 

[FireFool]

I just buy Turbo Tax each year and let it figure it out.

Paying taxes correctly is not the same as optimizing and/or understanding your taxes. The gazillion postings in regards to Roth conversions are and example of the complexity created need for understanding taxes so as to optimize your financial position.

 

[scrabbler1]

The forms should be right from the get go. If they need a month to do that, then tell Congress no changes after end of Nov, so forms can be online Jan 1.

People seem awfully willing to cut these people slack when this is their job. It's a big and important job that affects nearly every citizen, they should be expected to get it right.

-ERD50

Totally disagree. There will always be unforeseen and unintended consequences, so we shouldn't have to be stuck with bad forms for an extra year because an arbitrarily early due date. Having new forms out by late summer, after the filing season is over (excluding this year because of COVID-19) still gives the commercial tax form software folks plenty of time for the next tax filing season. I'm just trying to be practical. You want the 2020 tax forms to be ready on 1/1/2020 even though nobody will be able to use them (except for a few such as estimated tax forms) until 1/1/2021? Be serious, now.