Tax season is upon us, and around every kitchen table in the United States, citizens are complaining that there needs to be an easier way to file taxes. If even people with no income beyond their salary have to hire a tax accountant to comply with all the rules, something has clearly gone wrong. And it seems that even Washington has finally realized the problems. So where are we?
During discussions of Trump’s 2017 tax reform bill, some lawmakers on both sides said they would like taxpayers to be able to file their returns on a simple postcard. How close did they get? My wife and I have sent in our returns, so it’s a good time to think about the system. I can assure readers that this was not just a postcard for us!
For our farm, with sales, seeds, fertilizer, and property taxes, we had to fill out five pages before landing on Form 1040. A postcard-sized tax return will never work for us. , but I want to see how close these lawmakers have come, and then look at another system that’s even simpler than a tax return on a postcard.
The Form 1040 we all know had two full pages, but the revamped form has two sides, each about two-thirds of a page. It would fit both sides of one of those larger postcard advertisements that many of us get in the mail.
The 1040 begins with the standard name, rank and serial number: address and dependents. Row 1 lists salaries. This is documented by an attachment from the employer showing the amount paid and the amount withheld for taxes and required deductions. Row 2 is interest earned and dividends are entered in row 3. Owning a few stocks is very American. Lines 2 and 3 require Schedule B, but only if the total is greater than $1,500. So far, so good. Lines 4, 5, and 6 are IRA, Pension, and Social Security, with a 1099R, which is the retirement equivalent of the W-2. Line 7 is capital gain or loss, which requires Schedule D, but only if you sold some of those shares from line 3. Line 11 is adjusted gross income.
Now the fun begins with the subtractions on line 12a. The 2017 reforms changed that era. It has been argued that the Trump reforms are for the wealthy only and should be repealed. Take a closer look. The choices on 12a are a standard deduction or an array of loopholes on Schedule A, which we call itemized deductions. Prior to the 2017 reforms, nearly half of taxpayers faced the cumbersome paperwork of itemized deductions. But with the standard deduction doubling to $12,500 ($25,000 for married joint filing), now only about 10% of filers would itemize. Then, to make the standard deduction more attractive, the loophole on what is called SALT was limited to $10,000. It costs me money, but I think it’s absolutely the right thing to do. State and local taxes (SALT) were fully deductible, meaning taxpayers in high-tax states would have a lesser burden on Washington than residents of more frugal states. I find it interesting that a number of rather liberal legislators who say raise taxes on the wealthy want to restore the full SALT deduction. Tax the rich, but make an exception for their rich.
Line 12b was added after the 2017 reforms. It allows a $600 deduction for charitable contributions for couples taking the standard deduction. Line 15 is taxable income. This is the last line on page 1. Line 16, the first line on page 2, is your interim tax. This can be adjusted if you qualify and can document the deductions. Line 24 is the last tax you owe. Line 25 is W-2, 1099R and other payments for which you received documents, which you must attach. In the next step, you indicate whether you overpaid or underpaid the amount of tax you owe. If you underpaid, you send a check to the IRS. If you overpaid, you either get a refund or ask the IRS to apply the amount to next year’s taxes.
The last thing you need to do is sign and date the return and send it off.
If your income is from an IRA and/or Social Security, your signed postcard does. Millions of filers then just need that card with W-2 or 1099 attachments. The number of people detailing deductions has dropped from about 50% of all filers to about 10%. In summary, postcard politicians have done quite well.
Could it be even simpler, though? My niece Christina in Frankfurt, Germany tells me that about half of her professional-level friends pay a lot of tax but, quite legally, don’t file a return. I don’t think it would fly here, but it’s interesting to watch. The employer calculates what you owe in taxes and deducts this amount from your salary. All social insurance payments, including unemployment, disability, retirement and basic health care, are also deducted by the employer. Health care payments are a percentage of earnings.
What about all these other deductions we may have? We have the Child Tax Credit, and they have Kindergeld (money for children) paid directly by the government and not through the tax system. There are assistance programs for the purchase or construction of houses, but again, this does not go through taxation. Overall, the Germans are risk averse and own relatively few stocks. If they do, any tax is deducted before the dividends are sent to the shareholder. Property taxes are minimal and there is no equivalent to our state taxes.
There is, however, in Europe a stealth tax called Value Added Tax which can be quite high. It’s a sales tax. In the United States, if we spend $100, sales tax will be added to that amount, so with every purchase we are reminded of the tax. However, if you spend €100 in Europe, the tax is hidden in the final price. You never really know how much you paid in taxes.
Christina and her husband own two rental units with income and expenses. As a result, they must file a tax return.
Postcard or not, it’s the season to think about these things.
Carson Varner is a professor of finance, insurance and law at Illinois State University.