How to Do Your Taxes if You’re a Parent

No Federal Tax Relief in Sight, Only Ever-Growing Complexity

Significant tax relief under our enormously complicated federal income tax system probably won’t happen anytime soon. Complex to the point of being beyond the ability of any one person to understand it, our tax code has grown from its original about-900 pages since its inception in 1913 to well over 70,000 (if you include IRS rulings) today. (See the astonishing chart in Joshua Hedlund’s post, “Taxes and the Slow War on Law-Abiding Citizens.”)

Illustrative of how complicated our tax system has become and the role it plays in national politics, the Obama Administration’s 2013 budget touts several “tax reform” measures that include:

Proposed “Reforms”:

  • Allowing the 2001 and 2003 Bush tax cuts for “high-income” Americans expire. The budget projects $980 billion in “savings” over 10 years.
  • “Simplifying” the tax code and lowering everyone’s tax rate.
  • Removing “generous tax breaks” for millionaires
  • Closing tax loopholes that permit millionaire financial managers to pay only 15% in taxes
  • Requiring households earning more than $1 million a year to pay not less than 30% in income taxes
  • Ending tax breaks for companies that ship jobs overseas
  • Ending tax breaks to energy companies, “saving” $41 billion over 10 years

Proposed Tax Credits:

  • Extending the payroll tax credit until the end of 2012
  • Offering tax credit of 10%  (up to $500,000) for small businesses for hiring new employees
  • Offering tax incentives for U.S. manufacturers
  • Making the Research and Development tax credit permanent
  • Making the up-to-$10,000 per student for four years of college permanent
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What’s wrong with this picture?

Politics aside — and there is mostly nothing but politics in any political party’s advocacy of tax “reform” — nothing in the foregoing proposal provides much in the way tax relief, except to shift the burden more to the higher-income earners. Robbing Peter (the rich) to pay Paul (the not-so-rich) will always elicit the support of Paul. Peter, on the other hand, will find newer and more inventive ways in the aforementioned 70,000+ pages of the tax code to avoid paying more. Lacking that, Peter will hire lobbyists and fund politicians to add more pages to the code to benefit those who earn the big bucks.

What should be done?

Perhaps instead of “tax reform” we should be talking about “tax simplification.” Unfortunately, that notion is much like the weather: Everyone talks about it, but no one ever does anything about it. The reason is simple: If we abolished the income tax code and went to a  flat-tax scheme, just think of the thousands of lobbyists, tax attorneys, accountants, IRS employees, etc., ad infinitum, who would be irreparably damaged. Also, take away our federal tax code and senators/representatives would lose a major tool in their reelection kit bag, which is how the tax code got so voluminous in the first place.

What the average middle- to high-income citizen can do is simply face the reality of our country’s tax system, which is the most complex in the world and is not going to change significantly anytime soon. That starts with knowing what is involved for tax deductions and credits and making earning, spending, and borrowing decisions based on that knowledge.

Whichever political party is in power will always advocate “reform,” but that “reform” is essentially shifting the burden to the “other side.”  The cost of doing business, given the girth and breadth of our federal system today, will keep expanding as everything goes up, including the average life expectancy of those “Peters and Pauls” who benefit from government largesse – pensions, deductions and credits.

Tax simplification is nowhere on the horizon. The United States is too deeply in debt and there is a powerful block of voters who have a stake in the status quo. The trick to staying out of tax trouble and possible debt and keeping more of the money you earned is to stay informed, make wise decisions, and do a good job in keeping records — just in case “other side” targets you come income tax time.