How to simplify AND reduce income tax

Well, we already have a tax system that is pretty simple (in terms of having one form for just about everything). It's called the Alternative Minimum Tax. It's pretty close to a flat tax, too. But I don't know many people who like it!. Congress likes it, because they can offer all sorts of tax goodies that reduce regular tax, but don't affect AMT. It comes to the rescue to keep the government from losing too much tax revenue.

For most people (wage earners) we could well adopt the British model of: IRS sends a bill or a refund; end of story. But our country has such a diverse population with many different financial circumstances, that what seems like should be simple to measure really isn't.

I have copies of my tax returns going back to 1969 (the first year I had access to an employer's copier, aka "Xerox Machine"), and I've seen how the law has become more complicated each year.

The last paragraph of yours that I quoted from tells us who really pays taxes. For those of us who work for a boss and have investment income from savings or securities, the IRS can in fact put the "income" side of our tax return together for us. About the only info they still need, which is available but not yet reportable by law, is the cost basis of any securities that were sold. Since the IRS can't make the same calculations for those whose income isn't reported on W2s or 1099s, this shows those returns that will accurately reflect income and those returns where the filers might have erroneously undercalculated their income and for whom there isn't as detailed an audit trail that can reconstruct it.

As an extreme case, I've wondered how Mexico can collect income taxes from merchants in border towns (even without drug cartels being a factor) since they're primarily cash businesses with the cash being a foreign currency.

All changes have a consequence. Raise standard deductions and somehow, since charitable deductions have no impact on taxes, donations drop. The mortgage deduction has similar consequences. In my opinion, the way to achieve something you'd approve of would be a ten year plan, so the shock to the system would be lessened.

Example - We are currently in "Roth Mania" mode. Fear of higher taxes at retirement has many converting and willing to pay tax at 28/35% today. A flat tax of even 20% would make that conversion a mistake in hindsight. I don't have answers for this issue, just highlighting it as one of the unintended consequences of changes to the code.

You point that most tax inputs are available to the IRS is well taken. TurboTax will import our W2s and all transactions from my Schwab accounts. Once brokers are responsible to track cost basis, they should begin pinging customers to advise basis if unknown to the broker. Banks can report mortgage interest, and local municipalities, property tax. The only thing missing here are my charitable deductions, so, yes, I agree with you that for most people, the process can be simplified completely. Joe

For me, AMT is pretty complicated. I let TurboTax worry about the calculation although I have no idea how it works. AMT seems complicated. Even if it were simplified, it strikes me that it is so odious that most people would not use it voluntarily until the bottom line were attractive enough.

For me, the description of the British sounds attractive. I can picture it as using the information W2, 1099, etc form to produce a preliminary bill. That could be revised by sending in the cost bases to back up any brokerage statements. The IRS sends forms to taxpayers indicating the information IRS lacks.

Why should the Federal tax system be used as a club to beat taxpayers into supporting charities. I donate because I have certain aims that can be furthered with my money. If you want to contribute a lot in an income deductible way, just fill out the tax forms as always instead of using an IRS short circuit tax calculation. But have it possible to have an easier path to paying taxes.

Taking a page from the supply side economists, simpler paths to tax paying will increase compliance.

Bill

The changes are subtle. I didn't say "drop like a rock," but there will be an impact nonetheless. I am in favor of the system you suggest, if only to get the cost of compliance down along with the burden of reporting.

I cannot figure out why there are limitations to the deductibility of charitable donations. Well, actually I can - congress people want to be the ones that dole out money and favors.

At one point in the history of the federal income tax, you could simply sign your W-2 and send it to the IRS in lieu of filing a return, if the wages shown were the taxpayer's only income and if the withholding equaled the tax owed.

AMT actually is not extra complicated. Or at least it's not any more complicated than the "regular" tax system and arguably less complicated.

What makes is appear complicated is that there is no separate set of AMT forms. By that I mean that there's no 1040-AMT, 4292-AMT, Sched A-AMT, and so forth.

Because of that all of the differences between the AMT and the "regular" tax systems (and there are many!) have to be reconciled on a single form (6251) and that makes it seem complicated.

If instead the rules were "Fill out your normal taxes. Then fill out Form 1040-AMT, Schedule A-AMT, etc. and pay whichever is more" there would be more work (filling out two sets of forms) but it would be clearer and simpler.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Why do you think it is self-evident that they should be fully deductible?

Why limit charitable donations? Why put a time limit on carryovers? Why discourage charitable giving?

The US tax system is currently a progressive one. The tax rate scales

*upward* with adjusted income. Are you saying the standard deduction should scale as well, in order to offset the rate scaling, and make the tax system less progressive? The standard deduction (exemption) under AMT currently scales *downward* with adjusted income, so your suggestion is a complete 180-degree turn from the current system. (Not agreeing or disagreeing, just asking for clarification).

You are ignoring the political implications of tax deductions vs. tax credits.

No one is club-beating me into supporting charities. My contributions from year to year have more to do with my total disposable income, not any potential tax benefits.

-Mark Bole

Who is discouraging or limiting charitable giving? Surely you don't give money to charity just because other taxpayers might subsidize a small percentage of it for you?

-Mark Bole

But there are.

In fact it is often necessary to prepare a regular tax and an AMT version of a form or schedule, look at the differences between the two, and transfer those differences to the 6251.

I don't have a complete list of such forms/schedules, but some that pop into my mind are the foreign tax credit form, the passive activities form, the depreciation form, especially that depreciation form!, Schedule D, an 8606 IRA form, and I'm sure others.

While the forms themelves are the same, one should be labeled regular and one AMT, and then fill out each, and flow the differences in bottom line to the AMT form.

And that only part of the story. Any portion of AMT resulting from timing issues, such as ISO exercise and depreciation expense, could lead to a later AMT credit, preserved and calculated on form 8801.

If you want to feel humbled, fill out an 8801 by hand.

It's not limited and it's not discouraged - unless the tax benefit is one's only reason for donating.

government tax policy certainly does discourage charitable giving. Obviously not all, though.

And that would be illogical. Giving away $100 to save $25 on taxes is a net loss for you.

Salmon Egg wrote: ...

It isn't a club but there is a carrot that seems to be quite effective in luring additional support.

The reason is that besides just the "it's a good thing" aspect it's pretty clear that _most_ of these entities are making positive impacts and that much of what they do is effective in reducing even larger demands on government resources for services.

The so-called fair-tax (national sales tax) is in a similar boat. The main reason it sounds "fair" is because it is starting out as simple. But I have seen some versions of it that already have ten deductions, e.g. for home sales, stock sales, college tuition, etc. Then that will mean annual filings with some Fair Tax Agency. And Congress will tinker each election. In a decade it will be the federal income tax all over again.

On the contrary, the income tax could be made as simple and automatic as the fair tax, should anyone implement this. My state tax return (CO) is five lines long and has one tax bracket. I gripe about having to pay as much tax on munis and capital gains as income. But the tax form is simple and takes five minutes to file.

of course it is limited. If I want to give all my income to charity but have to pay income taxes since the IRS will not allow a total deduction, I don't have all the money I earned available to give to charity.