How did the tax code get so convoluted?

February 05, 2014 by Dave Du Val, EA
stack of large books

How did the tax code get so convoluted? It’s a long story that begins long before the arrival of the first Form 1040 Income Tax Return of Annual Net Income of Individuals, a three-page form that allowed for six simply defined “General Deductions.” At that time the tax code was about 400 pages long.[1] Since then, we’ve had a hundred years of our government writing laws, finding mistakes and loopholes, writing more laws to correct mistakes and close loopholes, finding more mistakes and loopholes, and so on. Here are some current examples:


  1. Congress agreed on the lower limit for the new (and highest) tax bracket of 39.6%. In coming up with this, they obviously did not review the other brackets. Take a look at the 33% bracket for singles. It ranges from $186,351 to $405,100, a difference of $218,749. But the new limits for the 35% bracket are $405,101 to $406,750 which shows a range of only $1,649. With such a narrow window, there will be almost no one in the 35% bracket.
  2. The Internal Revenue Code has two different definitions of a “First-Time Home Buyer,” and neither fit the Webster Dictionary definition.
  3. The code allows for only two types of dependents on a tax return: Qualifying Child or Qualifying Relative. A taxpayer could qualify to claim a girlfriend or boyfriend and, say, that person’s 5 year-old child. Yet the child could not be a “Qualifying child” but might be a “Qualifying Relative” even if they are not related. And the girlfriend or boyfriend might be a “Qualifying Relative” even though there is no real relationship between them. Got that?
  4. The Internal Revenue Code has an income limitation on who can contribute to a Roth IRA, but, in 2010, Congress removed the income limitation for a Roth conversion. This created a new loophole. A taxpayer who makes too much cannot contribute to a Roth IRA today; but today that same taxpayer can open a nondeductible IRA and tomorrow convert it to a Roth IRA.
  5. Congress has been boasting about eliminating the “Marriage Penalty” to relieve a married couple of having to pay more in taxes than two single people living together who have the same amount of income and deductions. Yet there is no relief at all when it comes to capital losses, passive losses on rental real estate, the ceilings for the new Net Investment Income Tax and the New Medicare Tax, and many other provisions.

There’s a lot of talk about “tax reform,” but with 73,954 pages[2] of code to deal with and so many competing interests, we expect it will be a long time before we see a change in this cycle, and maybe we never will. Meanwhile, the tax code will continue to pile up.

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[1] http://www.cch.com/taxlawpileup.pdf
[2] Ibid.

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Rhonda D. Guillory, EA
Learning and Development Manager

 

Rhonda was a Seasonal Tax Return Reviewer at TaxAudit before joining the permanent staff as an Audit Representative in 2009. She has a Bachelor of Science in Computer Science and worked in the Information Technology field for 15 years before making a career change. Since transitioning to the field of income tax in 2003, she has prepared and analyzed hundreds of tax returns. Rhonda enjoys helping taxpayers and tax professionals learn and understand the fascinating world of income taxes. Currently, she is the Learning and Development Manager.


 

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