How Would You Change the Tax Code? Taxes Are Too Complicated!

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The tax code is complicated. It’s begging for an overhaul, and I would love to know how you would change the tax code. My preference would be to simplify, simplify, simplify. But that is easier said than done when there are so many competing interests with deep pockets. Why is the US Tax Code So…

The tax code is complicated. It’s begging for an overhaul, and I would love to know how you would change the tax code. My preference would be to simplify, simplify, simplify. But that is easier said than done when there are so many competing interests with deep pockets.

Why is the US Tax Code So Complicated?

The current tax system is a progressive tax system that increases as your income increases. This article about Marginal Tax Rates and Federal Income Tax Brackets explains this in more detail.

Basically, your tax rate increases as your income increases. However, only the amount of income you earn within each tax bracket is taxed at that rate, not the entire amount (as is commonly assumed).

Let’s look at the current Federal Tax Brackets to see this in action.

2022 Marginal
Tax Rate
Single Individuals
Taxable Income Above
Married Filing Jointly or
Qualified Widow(er)
Taxable Income Above
Head of Household
Taxable Income Above
Married Filing

Your taxes are blended at each of these rates, so you will need to do a little math to understand your Effective Tax Rate, or the amount of taxes you pay overall.

Of course, the marginal tax brackets don’t take into account tax credits or deductions, which lower your effective tax rate.

The Impact of Tax Credits and Tax Deductions

Tax credits and deductions can dramatically change the amount of taxes you pay. In some cases, you can end up paying no federal income tax at all (more on this in a moment).

Tax Credits vs. Tax Deductions: According to the IRS, “Tax credits provide a dollar-for-dollar reduction of your income tax liability. This means that a $1,000 tax credit saves you $1,000 in taxes. On the other hand, tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket. (source)”

Both credits and deductions reduce the amount of taxes you pay.

  • Tax Credit – Common tax credits include the Earned Income Tax Credit, Child and Dependent Care Credit, Adoption Credit, Lifetime Learning Credit, certain home improvement tax credits, and more.
  • Tax Deduction – Common itemized tax deductions include deducting the amount paid for state and local taxes, charitable gifts, the home office deductionmortgage interest deductions, medical and dental expenses, and more.

You can also save money on your taxes now by contributing to your retirement accounts, such as 401k contributions, or contributing to a Roth or Traditional IRA or another retirement plan.

Tips to reduce your taxes: Almost anyone can take actions to reduce their taxes, including harvesting losses by selling some mutual funds at a loss, increasing retirement fund contributions, increasing charitable contributions, and a few other things.

Half of US Households Pay No Federal Income Taxes

OK, almost half. The number is actually estimated at 47% (according to the Tax Policy Center), but that is close enough in my book.

How can taxpayers avoid owing federal income tax? The main ways are having a low enough income to be exempt from federal income taxes, or qualifying for enough tax credits, deductions, and exemptions.

Not only do some people not pay federal income taxes, but due to the number of credits and exemptions, some people actually receive a tax rebate from the government.

40% of People Profit from Federal Taxes

As if not paying federal income tax weren’t enough, many people actually make a profit from filing their taxes each year.

“The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment. – Yahoo News.

Take this example (same source):

The (recent tax code) changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.

Here’s how they did it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

Must be nice to get paid. 🙂

Taxes Are a Year-Round Task for Small Business Owners!

taxesI am a small business owner, which adds another layer of complexity to my situation. Gone are the days I can fire up a copy of TurboTax or H&R Block Online and finish my taxes in an hour.

It’s not unusual for me to receive income from over 50 different sources. Expenses are another story entirely! I use a company called Gusto to run my payroll. I pay estimated taxes and self-employment taxes on my business income. These help me avoid being subjected to underpayment penalties.

Once upon a time, it was easy to track everything manually, but I now use QuickBooks Online to manage my business income and expenses. And I hired an accountant as well. The combination of these two makes taxes much easier than before. But it still requires work throughout the year to maintain.

Related: Here is a full rundown of how we manage our business finances for those who are interested in a behind the scenes look.

Taxes Are Too Complicated!

I don’t hate paying taxes. I realize that society would be very different without public money. So I am all about paying my fair share of taxes.

But I hate the act of filling out the tax forms, looking for deductions, learning the new tax rules, sifting through data, visiting the IRS webpage, and trying to determine which write-offs and deductions are allowed or not, etc. (thank goodness for tax software like TurboTax or H&R Block!). While I honestly don’t mind paying my share of taxes, I also don’t want to pay more than I legally have to. So I double check and triple check everything to see if there is anything I missed.

Different Tax Systems & Alternatives to the US Tax Code

Each country has its unique spin on taxes. Some are very complicated, like ours. And other tax systems are very basic. Many have a combination of income tax and a national sales tax or Value Added Tax (VAT) System, in which taxes are incrementally added throughout the sales and supply chain and passed on to the consumers. In effect, this becomes a consumption tax, and is intended to pass on more taxes to those who spend more. There are pros and cons to these systems.

Different Types of Tax Systems:

  • Consumption Tax
  • Fair Tax / Flat Tax
  • Progressive, or Marginal Tax System
  • Sales Tax
  • Value Added Tax (VAT)

What Are Your Thoughts on Doing Taxes?

I’ll share my thoughts on the tax system: I Hate Doing Taxes. I don’t mind paying taxes because I know they are necessary for society.

My biggest complaint with the tax system isn’t having to pay, rather it is the complexity of the tax system and having to go through the filing process. There are thousands of laws, rules, loopholes, exceptions, and other rules that clutter the books and over-complicate what could be a relatively straight forward process. It is because of this complexity (and my small business situation) that I hired an accountant to do my taxes.

How Would You Change the Tax Code?

I think the tax code can be over-complicated and tricky. But changing the complexity of the tax system is not a job I am capable of doing, and eliminating the loopholes and the vast number of rules would probably put hundreds of thousands of people out of work.

photo credit: woodsy.

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Tyler says

    Can you clarify the 50% statement? Does this mean that 50% of people filing returns had ZERO net income, meaning they were returned all taxes that had been paid out of their income, or does it mean that 50% of filed returns were given a refund rather than owing money?

    • fredct says

      > (And let’s not forget the union exemption from the Cadillac plan tax.)

      Sorry, but, not true. There is no union exemption from the Cadillac tax. It was discussed, but it was not in the final bill.

      > Not sure where your trillion dollar deficit reduction comes from (Tocqueville? 😉 ) –
      > the number is $143 billion according to the CBO’s latest report.

      In the first 10 years, yes. The $1 trillion number ($1.3 trillion really) is for the first 20 years. I understand and agree with your skepticism on the accuracy of numbers with such a long time frame, but when you can be $1 trillion dollars wrong, and still be deficit-reducing, that’s a pretty good starting point. How much more you can really ask for? When’s the last time the Congress passed a bill that had an initial estimate anywhere near that good?

      >The CBO does not consider the adaptive behavior of medical providers and patients


      > I don’t have confidence in the federal gov to efficiently run a program on a scale of
      > such magnitude


      > I’m not saying let’s forget cancer patients, but financial fallout is inevitable with
      > these regulations.

      I’d really love to hear some specifics. A general sense of foreboding does not make for a particular convincing argument.

      Sure, things can go wrong… be it public or private, when aren’t there adjustments that need to be made later? Having worked in private industry for my entire working career now, and things always need to be fixed, and improved, and learn lessons.

      Saying it needs to be perfect (or nearly so) before anything can be done, is a way to never get anything done. A baseline lack of trust that nothing ever works is another sure way to make sure nothing ever gets done. Sure, SS, Medicare, Medicaid have their problems… but they also have their substantial successes. Would you really rather we had never had them? If so, you’re in the distinct minority.

      > The Schumer-Graham bill which includes a “pathway” to citizenship. In other
      > words, anyone in this country who is here illegally can be made legal.

      I don’t want to get too much into another topic. Especially since I fully admit that I know little about the bills in the works on immigration. I usually don’t find it worthwhile to put so much time into bills that are so preliminary and will probably have significant changes going forward.

      However, a “pathway to citizenship” is not “amnesty”. “Amensty” means “a general pardon for offenses, esp. political offenses, against a government, often granted before any trial or conviction.” If a pathway requires substantial steps and costs and effort, then it is simply not amnesty. I reserve judgment on any particular plan until I hear the details, but to start out misusing a word on day 1 – and a politically and emotionally charged word at that – is not the way to start.

      A pathway is not “amnesty” and every government program isn’t “socialism”. Misusing loaded words is not constructive for a national discussion. Or for an individual one.

      > Reducing taxes does not necessarily reduce government revenue. Lower taxes
      > create an environment conductive to business expansion, investment, job creation,
      > consumerism, and ultimately, more government tax revenue. That’s not just good
      > for my pocket; it’s good for the country. That said, I’m all for reducing spending,
      > too.

      I’m sorry, but you’re engaging in the long-discredited theory of ‘self-financing tax cuts’. The idea that tax cuts are so good for the economy that they actually generate more revenue than they lose. It’s a magical little bit of thinking, often used for rationalization, and it’s just not true. Wouldn’t it be so lovely if it was?

      Yes, tax cuts do cause economic activity (so does spending), but they don’t pay for themselves. A vote for tax cuts without spending cuts, is just as much a self-interested lining of your own pockets as is spending without paying for it.

      Lastly, to get back to the main topic, we both agree that 47% paying no taxes (although the figured it artificially inflated by the recession and the stimulus tax credits) is not a good long term plan. No argument there. It’s your using of the topic to jump off into inaccurate criticisms of the health care bill, as well as a refusal understand that the voting instinct to vote for your own pocketbook is just as strong – and dangerous – on both sides of the political spectrum.

      • fredct says

        Mostly the first one.

        Perhaps it’s me being a bit of a tax geek, but it’s not necessarily ‘zero net income’. You can have a net taxable income > 0 (1040 line 43) for the year, and a net tax for the year also > 0 (1040 line 43). But your various credits add up to more than your net tax, so that you’ve paid nothing today for the year.

        It’s definitely not the refund one.

        • Ryan says

          Tyler, the first one. Almost 50% of people had enough credits and deductions to effectively reduce their federal income tax to nothing, and almost 40% of people actually received more money from the government than they paid in taxes, effectively profiting from the tax breaks, credits, deductions, etc.

  2. fredct says

    Replying to Dan…

    “Lack of confidence in massive federal program efficiency: I gave you specific examples: SS, Medicare/caid… The onus is on your side of the argument to provide specific examples showing fed efficiency with huge programs.”

    The onus that you create appears to be a standard that basically no organization, public or private, could ever meet. Social Security, every year until last year’s ‘great recession’, has been cash flow positive… on a net-basis it is still way in the black (that the money was spent elsewhere isn’t in the SS program’s control). It has provided retirement security for millions, greatly reduced instances of poverty and related deaths in elderly populations. Yet you consider it a failure.

    Likewise, the USPS, established in the late 1700s has been very successful for the majority of it’s history. And consider what they offer… if someone told you “I have a service that will come to your home – no matter where you live in the country – hand pick up any note or letter you wish to deliver, and within a week – and often within a day or two – hand deliver it to any other home anywhere in the country… and the price for this is 44 cents” – you’d really consider that a failure? Postal service is the bargain of the century.

    Yes, the world is changing out from under their business model and they are struggling to adapt. And that is a damnation of all public programs? Was the end of the carriage makers a damnation of private industry? Is the collapse and nearly collapse without govn’t intervention of a dozen major banks in the past 2 years not a damnation of private industry? How many private companies have made it since the 1700s and not had any problems or lean periods – the standard you appear to be holding the government to? How many hundreds of thousands if not millions have gone out of business entirely?

    Speaking of efficiency, your decried Medicare and Medicaid operate with ~2% management overhead. Private insurers? Well over 20% management overhead. Yet you claim private industry is always more efficient?

    The fact is, by saying that SS, Medicare, Medicaid, the USPS, etc are failures, you are setting up standards that no private company could ever meet either. You are holding government agencies to a standard of utter perfection in order to pass your ‘threshold’, while doing no much thing in the private marketplace.

    “If the rate is too low, it’s obvious that you don’t collect enough revenue. On the other end of the scale, there has to be a point at which a rate increase stagnates the economy and reduces revenue… I would seek an optimal area in the middle. Otherwise, where’s the theoretical basis to not raise rates through the roof?”

    I completely agree with everything you said here. I just think we disagree on what makes for the ‘optimal area in the middle’. An increase from 35% to 40%, for instance, I think it still well within that optimal area.

    “As far as “self-interested” voting goes, I would bet that most tax-payers who vote for tax cuts are also strongly in favor of spending cuts and want to see the debt reduced. In fact, most politicians that campaign on tax cuts usually also promise reduced spending (whether or not they make good on the promise).”

    So this gets back to our main disagreement…

    I’m sure that most are. And the same goes the other way around. People who vote for new programs also – by in large – strongly support properly funding them. No one really ever votes to raise the deficit.

    I figure your counter point will be that, yes, but they usually want it paid for by others. And that is likely often true… but likewise, people who want spending to be cut, usually want programs cut that help *others*. My argument is simply that there is no particular moral high ground on this argument. One side often wants to pay programs for them by taxing others. The other side often wants to pay for tax cuts for themselves by cutting programs for others.

    Do not pretend that there is a morally superior position here.

    And one key thing to note… I said a *realistic* plan to cut spending. I can’t recall the last time I hear a conservative campaign get more specific than “I’ll cut waste, fraud, and abuse”. That’s not specific, and basically means they have no idea when or where they’ll cut, or if they do, they don’t want to share.

    To get explicit partisan for just one paragraph, the difference between the parties lately has been that for *most* of what they do, the Democrats offset it to remain deficit neutral, the Democrats regularly pass pay-as-you-go rules (while imperfect, are a step in the right direction). The Republicans on the other hand, pass large tax cuts without any offsetting, and also start new entitlement programs (part D), without any offsets. In recent history, at least the Dems have *tried*, which beats not giving a damn when you’re in power (Republicans) any day. Republicans seem to only give a damn about deficits when they’re the minority and sniping on the Democrats.

    • Dan says

      It may not be specifically Social Security’s fault that its funds have been plundered through the decades, but that falls under the banner of federal inefficiency. For Medicare/caid, despite the low overhead of only 2%, they’re still heading for a cliff. These programs may be solvent today, but that won’t last long according to projections.

      Speaking more generally now, the only standard I’m calling for is a black balance sheet. This is impossible to achieve?

      Taken as a whole, I don’t consider the rise and fall of businesses throughout U.S. history as a damnation of private industry. It is through this sometimes painful process that we have almost constant growth of GDP, technology, and standard of living for all. When I see companies go out of business because of poor financials or an obsolete product, that’s the self-cleansing mechanism of the market working properly.

      Similarly, I’m not condemning public programs as a whole. I acknowledge the good they have achieved. However, one of the differences with public vs. private is the corrective process. The only check-balance for government programs is the election booth which is very limited in power to affect budgeting. The branches of government change parties over the years, but we still have massive debt from the same entity that all citizens are forced to fund. In this sense, the federal government is held to a lower standard than private industry: Any private company operating its finances like the fed gov would have to shut its doors, as it can only receive revenue from people by choice (government grants, kick-backs, and bailouts aside).

      That is what takes away my faith that the health care bill will be deficit and cost-reducing, and self-financing.

      I see your point about people wanting cuts in their own taxes and other people’s programs and the reverse. The great ethical imbalance that I see is that regardless of intent or net result, the 47% (there’s that number once again) don’t have skin in the game the same way that the 53% do. They’re not paying into the system.

  3. Scott Greene says

    The current Income Tax system has been falling apart for years.

    Even CPA’s and tax preparers do not understand the Income Tax system, as evidenced by the different answers you get to the same questions about how to report various income transactions.

    Just look at the enormous amount of tax court cases where people pay money to argue with their government over what is deductible, what is not deductible, what can be carried forward, what can be carried back, what are the facts and circumstances surrounding the income and/or deductions, etc. etc.

    If this 75,000 page income tax code was clear and understandable, there would be very little arguments over much of anything!

    So instead of people spending their time making money, they end up spending time and money figuring out how to comply with the government’s bookkeeping requirements, which change every single year!

    The current Income Tax system is a horrid mess and hurts everyone.

    Anything (flat tax, fair tax or 9-9-9) would be light years better than the insanity we have now.

  4. John Crly says

    A FLAT 15% Federal Tax, zero deductions, no double or triple taxation would immediately raise $2.55 Trillion, which would get Congress out of the business of legislating the code to their own ends and gives them a hard budget to work within to ultimately balance the budget. It would initiate the effort to close the current spending gap which is at a record 23%. We The People are currently steering ourselves into the brick wall of insolvency if we don’t act immediately. Oh, and a flat tax would reward stable, single digit returns by pouring them into real capital investments. A win-win for America.

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