2. Cut Deductions and Phaseouts
Another easy way to simplify the tax code would be to cut a number of deductions and phase-outs (rules limiting how much you can deduct after you reach certain income thresholds). Getting rid of deductions would reduce tax perks we enjoy, so to make up for it, we could just decrease the income tax rate.
Many of these deductions make people’s tax returns more complicated without necessarily adding value. Cutting down on deductions would also ask the wealthy to pay more in taxes directly. Right now, a lot of people don’t actually know their tax rate. I’ve heard clients who are in the 39% tax bracket rant and rave about paying 39% of their income to taxes. But I know their tax returns inside out, and they’re really paying more like 28% after deductions.
It would be good for all of us to have a better understanding of what we really pay.
For instance, I would cut out, or at least simplify, deductions for:
- Medical care you pay for
- DMV fees
- Gambling losses
- Investment margins, which allows day traders who trade on margin to write off the margin interest on their brokerage accounts
- Tax fees to CPAs
- Mortgage interest (though I know this proposal isn’t going to be popular, one can argue that this deduction artificially inflates home prices and mortgage rates—sellers can inflate their price tags somewhat, knowing that buyers are mentally calculating their savings come tax time)
- Property taxes
3. Make It Easier to File
This has nothing to do with the tax code itself, but the process of filing. Since I run a boutique tax company, I have tax software (UltraTax or Prosystem fx) that allows me to scan a W-2, mortgage interest form (1098) and a property tax statement. In some cases, with almost no manipulation, the software will spit out an accurate return.Since this technology exists, why can’t we have kiosks at libraries and malls that allow people to input this information so they don’t have to pay anyone to do their taxes at all? It would be an easy way to get people to file for free.
The IRS has a free file program that works with the major consumer tax software producers like TurboTax and H&R Block to file your taxes for free if you make $57,000 or less. But free tax services shouldn’t be based on how much money you make. They should be based on how simple or complicated your individual situation is.
A Step in the Right Direction
The government did take one step toward simplifying the tax code this year with the home office deduction. Previously, you had to complete a 43-line form, calculating allocated expenses and depreciation, among other things. Now, if you qualify, it’s $5 per square foot for up to 300 square feet. That’s much easier, and most importantly, it will make things simpler for the more than 14 million small businesses based in the home.
For my clients, I will always advocate every legal and accurate mechanism I can find in the tax code to reduce their tax burden. This is my passion. But for most Americans who aren’t accountants, it should be easy to pay one’s fair share. Plain and simple.
Gary Craig is a certified public accountant and the owner of Craig & Associates, LLP, a tax firm in Orange, CA.