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since december of 2020 i have uploaded
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99 videos attempting to oversimplify the
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complexities of the united states income
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tax system but one question i have never
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answered is why why does this channel
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need to exist why has our tax system
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evolved to a point where it's just about
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impossible to comply with the income tax
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laws without either a computer or a paid
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tax professional with a computer
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i'm the tax geek and in this video i'm
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going to try to answer the question why
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are taxes so complicated
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[Music]
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rarely does a year go by that congress
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doesn't make at least some changes to
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the tax code since the last more or less
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top to bottom rewrite of the tax code in
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1986 the code has been changed thousands
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of times mostly as part of broad-based
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legislation
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there have been attempts to simplify the
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tax code the original intent of the tax
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reform act of 1986 which created the
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framework of the tax code we used today
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was to create a simpler more streamlined
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tax structure with only two marginal tax
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rates tax capital gains the same as all
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other income introduce a larger standard
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deduction and personal exemption and
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eliminate restrict or reduce many tax
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deductions
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which it did for a very short time
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you see congress has long used the tax
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code not only as a means to raise
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revenue but also as a means to encourage
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certain behaviors through the creation
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of tax incentives in the form of
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deductions or tax credits
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by promising people a lower tax bill or
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a larger refund the government can do
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such things as encourage people to
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purchase homes
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have or adopt children purchase health
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insurance pursue higher education save
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for retirement or give to charitable
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causes
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every one of these incentives adds
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complexity to the tax code
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but congress still needs to raise
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revenue but raising taxes is spoiler
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alert extremely unpopular so instead
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congress tries to reduce or eliminate
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some of these tax advantages however
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congress finds it extremely difficult to
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eliminate these incentives once they're
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enacted the problem is that every
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deduction credit or other tax advantage
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enacted by congress gains a constituency
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comprised of taxpayers who benefit from
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that tax advantage some of these
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constituencies are very vocal making any
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attempt to eliminate any tax advantage
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difficult if not impossible
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so instead of eliminating these
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advantages congress subtly modifies them
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adding restrictions that perhaps make
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them a little more difficult to take
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advantage of usually for people at
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higher income levels
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and every one of these actions further
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increases the complexity of the tax code
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let's look at six different parts of the
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tax code and see how they become more
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complex over time
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deductibility of interest paid on loans
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has been a part of the tax code since
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the first modern income tax code was
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enacted in 1913.
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the 1986 code limited the deductibility
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of interest personal interest on auto
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loans credit cards personal loans and
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student loans would no longer be
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deductible
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but to soften the blow for those
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deducting large amounts of personal
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interest these deductions would be
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phased out over three years
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mortgage interest remain deductible but
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only on up to two homes and only on
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mortgage indebtedness up to one million
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dollars but this is only for loans
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written after 1986.
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all previously written loans used the
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pre-1986 rules
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and within a few years after hearing
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from people who weren't allowed to
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deduct student loan interest congress
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reinstated the deduction this time as an
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adjustment to income rather than an
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itemized deduction and imposing an
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overall limit of two thousand five
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hundred dollars in student loan interest
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per return and limiting the deduction to
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those with incomes below certain levels
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then in 2018 the mortgage interest
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deduction was further restricted to
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loans less than seven hundred fifty
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thousand 000 but
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this limitation only applied to
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mortgages originated after 2017. loans
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originated before 2018 could continue to
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use the old limitation so now we had two
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and possibly three sets of rules
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covering the same deduction
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also in 2018 taxpayers could no longer
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deduct interest on most home equity
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loans
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finally in 2018 a limitation on excess
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business interest was enacted businesses
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that are affected by these restrictions
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need to file a three-page form to comply
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with them
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as you can see we've come a long way
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from all interest is deductible
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the tax cuts and jobs act which took
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effect in 2018 was touted as both tax
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reform and tax simplification and here
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are some of the results a new one-half
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page simplify 1040 replaced the existing
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1040 1040a and 1040ez but since nothing
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was truly eliminated from the tax code
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six new schedules were created for items
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that were still in the tax code but not
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included on the new 1040.
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many tax preparers myself included hated
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the new 1040 explaining a tax return to
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a client now involved constantly
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flipping through several schedules to
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show where each number came from
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as a response to preparer feedback the
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form has since been expanded back to two
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full pages and the number of the
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supporting schedules reduced to three
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but a major shortcoming of the tax cuts
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and jobs act is that a number of
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deductions were eliminated for some
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taxpayers but retained for others
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meaning that now two sets of rules exist
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where only one existed before we've
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already looked at the axe effect on
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mortgage interest but here are a couple
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of others
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the adjustment for job-related moving
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expenses was eliminated for most
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taxpayers but it was retained for
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members of the armed forces
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under the new law alimony was made
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non-reportable as income and
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non-deductible as an expense
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but the original rules were kept in
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place for agreements made before
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december 31 2017 that divorced couples
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could use if they wanted
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finally every provision of the tax cuts
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and jobs act is temporary expiring in
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2025 which means in 2026 we'll have to
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completely reverse gears and prepare
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taxes using pre-2018 law
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and the act's qualified business income
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deduction deserves a section of its own
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which is coming up next
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[Music]
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the intent of the qualified business
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income deduction was to give smaller
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businesses that were not structured as c
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corporations a tax reduction comparable
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to the significant reduction in the
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corporate tax rate
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the result was a deduction that depended
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on five different factors and is
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calculated five different ways
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you may have already seen this video
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that was an introduction to the
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qualified business income deduction but
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it only covers the simplified
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computation
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at higher income levels the deduction
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becomes orders of magnitude more complex
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to calculate the qualified business
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income deduction for a taxpayer with
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ordinary taxable income between low and
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high thresholds takes a 12 step process
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which is currently being written on the
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chalkboard and is reported on yet
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another two page form with up to four
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attached schedules
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if you can't follow the calculation well
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neither can many highly experienced tax
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professionals at this point i have no
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choice but to ask who came up with this
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calculation what type of twisted mind is
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capable of devising such a thing if
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anyone knows please leave a comment
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moving on
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capital gains tax has been the subject
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of several videos on this channel
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several videos were required to break
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down capital gains into smaller chunks
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that are easier for people to understand
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the tax reform act of 1986 greatly
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simplified capital gains tax by taxing
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them like any other income
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since the top marginal tax rate was now
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relatively low it was felt there was no
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need for preferential rates for capital
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gains
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this changed as the top marginal tax
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rate rose again through the 1990s and
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2000s so preferential rates were once
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again reintroduced for capital gains
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today gains on the sale of capital
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assets can be taxed at any one of or a
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combination of five different rates
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when this tax is calculated it is then
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compared to the ordinary income tax on
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those gains and the lower amount is the
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actual amount of tax
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depending on what type of capital assets
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you are selling capital gains tax is
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calculated on either this one page 25
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line worksheet or this two page 47 line
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worksheet
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and because qualified dividends are also
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taxed at capital gains rates any
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taxpayer that has more than a few
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dollars in qualified dividends needs to
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complete the 25 line qualified dividends
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and capital gains worksheet to calculate
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their tax it leads me to wonder how many
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people who prepare their taxes by hand
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with pencil paper and calculator don't
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even bother with the worksheet and pay
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more tax than they should
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[Music]
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prior to 2023 the federal plug-in
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electric vehicle credit was relatively
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straightforward with only a couple of
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complications
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the credit was a non-refundable credit
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of up to seventy five hundred dollars
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based on the capacity of the battery in
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the vehicle
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the only additional complication was
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that as a manufacturer produced over two
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hundred 000 vehicles the credit would no
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longer be available for that
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manufacturer's evs
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in 2023 electric vehicle credits will
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change as the result of the inflation
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reduction act in addition to being based
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on battery capacity the new credit will
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only be available to vehicles assembled
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in north america with battery components
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also produced in north america
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the 200 000 vehicle manufacturer cap was
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eliminated but the new credit has a cap
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on vehicle prices and income limitations
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that prevent people with higher incomes
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from taking the credit
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there is also a new credit of up to
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thirty percent of the price of the
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purchase of a used vehicle with a
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maximum of four thousand dollars but the
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vehicle must cost less than 25 000
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and must be at least two years old
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and finally starting in 2024 you will be
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able to take the credit in advance to
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reduce the purchase price of the vehicle
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at point of sale
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since this is an advanced credit and
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income limitations are in place the
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advanced credit will probably have to be
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reconciled with the actual credit when
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you ultimately file your return
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the clean vehicle credit is thus a
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classic example of making something
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that's relatively simple much more
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complicated
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the affordable care act essentially uses
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the tax system to encourage people to
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obtain health insurance by offering them
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a tax credit for doing so
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in the initial years the affordable care
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act was in force it also used the tax
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system to penalize those who didn't
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obtain health insurance this particular
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penalty easily the least popular part of
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the affordable care act was dropped as
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part of the tax cuts and jobs act
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now offering people a tax credit for
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purchasing health insurance seems fairly
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straightforward until you take a look at
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how the credit is calculated
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a typical calculation of the premium tax
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credit is being shown on the chalkboard
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another five-step process that requires
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consulting two different tables
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in addition to that an estimated amount
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of the credit is advanced to most
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taxpayers monthly to offset their health
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insurance premiums the estimated credit
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then has to be reconciled with the
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actual credit and the difference either
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collected from or refunded to the
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taxpayer
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and if you're a small business person
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who claims both the premium tax credit
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and the self-employed health insurance
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deduction here is what happens
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your premium tax credit is based on your
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family income which includes your
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adjusted gross income
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since the premium tax credit affects
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your health insurance premium which in
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turn affects your self-employed health
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insurance deduction which affects your
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adjusted gross income which affects your
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premium tax credit which once again
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affects your income which affects your
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premium tax credit which affects your
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income which affects your premium tax
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credit which affects your income which
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affects your premium tax credit which
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affects your income which affects your
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premium tax credit which affects your
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income
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and probably the worst thing about the
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affordable care act is that it more or
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less invented the concept of advancing
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tax credits and reconciling them when
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the tax return was filed and this
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concept was used for the 2020 and 2021
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recovery rebate credits the 2021 child
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tax credit and will probably be used for
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the new ev credit
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and i haven't even touched upon other
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complex parts of the tax code such as
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the alternative minimum tax
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kiddie tax and nanny tax net investment
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income tax additional medicare tax and
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many others most of these subjects will
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be tackled in future videos as soon as i
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can figure out how to oversimplify them
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to the point where you can easily
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understand them
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i hope you enjoyed this deep dive into
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the complexities of our tax system and
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found it to be at least interesting if
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you did please give the video a thumbs
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up
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if you want to see oversimplifications
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of these topics and many more please
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subscribe and of course your questions
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comments suggestions and the occasional
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complaint about our tax system are
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always welcome in the comment space
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below
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thanks for watching this video and
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helping me celebrate the 100th video
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uploaded to this channel and i'll be
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back soon with more of your over
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complicated taxes oversimplified
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[Music]
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you
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