Why taxes are so complicated

Income taxes have been around since 1862 when the US Government needed funds to finance the Civil War. Tax rate then was 3% for earnings from $3000 to $10000 and higher rates for income above $10000. The income tax was made permanent in 1913 when Congress enacted the Sixteenth Amendment.

Even since then, tax policy has been tied to providing economic incentives and disincentives. In order to help the housing industry, mortgage interest deductions were put in the tax law. Several years later, complicated rules for passive loss and mortgage interest deduction limits were introduced to create tax revenue and provide discourage ownership of rental property and large mortgage refinancing. Our current tax law has several examples like this and there is no end in sight.

Here’s the real reason why taxes have be made so complicated….the personal computer. Unlike a generation ago, very few people prepare a return by hand now and those that I have seen have made several errors. We now use tax software to accurately compute tax rates, limits, alternative minimum tax, generate and electronically file our taxes. Whether you use a tax preparer or do your own return using Turbo Tax, you have to accurately enter data into the program and count on the tax software to do its job properly. Even the IRS counts on computers to generate notices if the data entered into your tax software does not match their records. If people did not have access to computers and people were forced to do returns by hand, Congress would not create laws that require complicated limits or computations.

What can you do about it? Personal computers are not going away so neither is the complexity of the tax law. Once you sit down to compile your information for your preparer or enter your info into Turbo Tax, your ability to effect your tax refund or tax due is pretty much gone. For 2012, now is the time to think about your 2012 taxes…not before April 15 next year. Keep your documents and receipts in one envelope or location now rather than trying to remember what happened in when most people think about it next year. Do your own research or talk to your tax preparer or adviser about tax projections and planning. The legwork you do now will make you happier and your life less taxing next April 15th.