US tax code longer than Bible and without good news

originally appeared in The Associated Press:


Too intimidated to fill out your tax return without help? Join the club.

At nearly 4 million words, the U.S. tax law is so thick and complicated that businesses and individuals spend more than 6 billion hours a year complying with filing requirements, according to a report Wednesday by an independent government watchdog.

That's the equivalent of 3 million people working full-time, year-round.

If tax compliance were an industry, it would be one of the largest in the United States, according to a report by the National Taxpayer Advocate.

The days of most taxpayers sitting down with a pencil and a calculator to figure out their taxes are long gone, she said. Since 2001, Congress has made almost 5,000 changes to U.S. tax law. That's an average of more than one a day.

As a result, almost 60 percent of filers will pay someone to prepare their tax returns this spring. An additional 30 percent will use commercial software. Without the help, she says, most taxpayers would be lost.

On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments, she said. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.

The tax advocate ranks complexity as the most serious tax problem facing taxpayers and the Internal Revenue Service in her annual report to Congress. She urges lawmakers to overhaul the nation's tax laws, making them simpler, clearer and easier to comply with.

Momentum is building in Congress to overhaul the tax code for the first time since 1986. But Washington's divided government has yet to show it can successfully tackle such a task.

President Barack Obama and Republican leaders in Congress say they are onboard, though they have rarely seen eye to eye on tax policy. They struggled mightily just to avoid the year-end fiscal cliff, passing a bill that makes relatively small changes in the nation's tax laws.

Undaunted, the top tax writer in the House says he is determined to pass reform legislation this year.

This report confirms that the code is 10 times the size of the Bible with none of the good news, according to Rep. Dave Camp, chairman of the House and Ways and Means Committee. Our broken tax code has become a nightmare of loopholes and special interest provisions that create added complexities and costs for hardworking taxpayers and small businesses.

Comprehensive tax reform will make sure everyone is playing by the same rules and help businesses create more jobs and invest in their workers, Camp said.

The general formula for tax reform is widely embraced on Capitol Hill: Eliminate or reduce some tax credits, exemptions and deductions and use the additional revenue to pay for lower income tax rates for everyone. There is, however, no consensus on which tax breaks to scale back.

That's because Americans like their credits, deductions and exemptions - the provisions that make the tax law so complicated in the first place. Would workers want to pay taxes on employer-provided health benefits or on contributions to their retirement plans? How would homeowners feel about losing the mortgage interest deduction?

Those are the three biggest tax breaks in the tax code, according to congressional estimates. Together, they are projected to save taxpayers nearly $450 billion this year.

In all, taxpayers will save about $1.1 trillion this year by taking advantage of tax breaks, according to the Joint Committee on Taxation, the official scorekeeper for Congress. That's almost as much as individuals will pay in income taxes.

To avoid angering millions of constituents who rely on popular tax breaks, politicians prefer to endorse tax reform without getting into specifics. Instead, they say they want to reform the tax code by eliminating special interest "loopholes" that help only small but well-connected groups of taxpayers.

Obama has repeatedly said he wants to eliminate tax breaks for hedge fund managers and companies that buy corporate jets. Throughout the recent fiscal cliff debate, House Speaker John Boehner said he favored raising additional tax revenue by reducing unspecified tax loopholes rather than raising income tax rates.

The tax advocate defines "loopholes" as tax breaks that benefit someone else. She warns that targeting only narrow provisions won't raise enough revenue to significantly lower rates or make the law much simpler.

That's what we've been trying to say to taxpayers, that the special interests are us. It's not just oil and gas or whatever you want to point your finger at, she said. That's not where the money is.

Tax Changes for 2012

First appeared in USA Today
As Americans receive their first paychecks of the new year, there are some tax provisions they can count on.

Individual tax rates will be the same for 2012 as they were in 2011, as will the 15% maximum tax rate on capital gains. People at higher incomes won't see their personal exemptions or deductions phased out. And credits for adopting a child and for college expenses continue.

But several deductions, credits and other provisions that existed for 2011 will no longer be in place.

The alternative minimum tax exemptions will drop to pre-2001 levels if Congress doesn't pass a patch and make it retroactive to cover the entire year. If history is any guide, however, Congress will do that.

Similarly, without congressional action people over 70½ will no longer be able to make tax-free withdrawals from their IRAs for a charitable contribution, and teachers won't be able to take a $250 deduction for classroom supplies bought with their own money.

"During the course of 2012, the IRS will be keeping a close eye on developments in Congress," agency spokesman Terry Lemons said. "There are a lot of open question marks."

The 2012 presidential elections, the partisan discord in Congress and the outcry over the size of the federal deficit all add to the uncertainty. If there's any doubt, just consider the battle over extending the 2 percentage point cut in Social Security payroll taxes. Agreement could only be reached on a two-month extension despite statements by the White House and both Republicans and Democrats in Congress calling for retaining the reduction for all of 2012. That battle will resume later this year.

Tax experts advise people to monitor other developments as well.

The IRS recommends reviewing your withholding sometime during the year to make sure it is in line with what your tax liability is likely to be. There's a withholding calculator on its website, http://www.irs.gov/. By having less withheld, people can get their money upfront, rather than waiting for a refund.

For most of us, checking our withholding and preparing tax returns are among the biggest financial tasks we face, Lemons said.

Some of the tax law provisions still in effect for 2012:

• The Bush tax cuts, which set marginal income tax rates of 10%, 15%, 25%, 28%, 33% and 35%. These rates will increase beginning in 2013 unless they are renewed by Congress.
• Capital gains tax rates of 0% and 15%. Capital gains generally are the increase in the value of an asset, such as stock or a home, from time of purchase until sale. Net long-term capital gains — those on assets held more than a year — are taxed at the 0% or 15% rate. Net gains on assets held less than a year — short-term gains — are taxed at the regular income tax rates.
•  The child tax credit of $1,000 per child. The credit will drop to $500 in 2013 unless Congress acts.
• The higher earned income tax credit for families with three or more children. After 2012, families with three or more children will be treated the same as those with two children if Congress doesn't pass an extension.
• The credit for expenses associated with the adoption of a child. However, the adoption credit is no longer refundable and is limited to $12,650 in 2012. It phases out for people with higher incomes.
• The American Opportunity Credit, which allows a maximum credit of $2,500 for tuition and other expenses for each of the first four years of higher education. The credit, which also phases out at higher incomes, is partially refundable.
• Some of the provisions that expired at the end of 2011:
• A patch for the alternative minimum tax. Absent congressional action, the exemption will drop to $45,000 for married couples filing jointly, $33,750 for single person or the head of a household, and $22,500 for married people filing separately.
• The deduction for state and local sales taxes, in lieu of state and local income taxes.
•  The deduction for qualified tuition and fees.