Filing taxes here versus in his home country of Sweden couldn’t be a more divergent experience for Jens Peter de Pedro.
There, de Pedro receives a tax return with everything filled in by the government. He can sign it and return it by mail or app. He can call and enter a code to accept it. Or, he can text his tax return code and reply yes, similar to confirming a restaurant reservation.
But in the US, his American wife “disappears for a couple of days to deal with the taxes,” he said, a time of year de Pedro describes as a “pain point in our family.”
“I don’t know what goes on. It’s like a black box,” he said. “I don’t understand what makes it so complicated in the US.”
Welcome to tax time in the US, where the average American spends 13 hours and $270 to file the most basic federal tax form. Our country’s tax code spans 4 million words, and its complexity contributes to why a fifth of eligible Americans don’t claim one of the most valuable tax credits available.
“The current system wasn’t designed top to bottom consciously,” Alex Muresianu, senior policy analyst at the Tax Foundation, told Yahoo Finance. “The story of the income tax is of individual changes made across several decades and then it piled up into what we have today.”
To be sure, other countries have yet to figure out how to streamline taxes among the self-employed, but when it comes to 9-to-5 workers, they are far ahead of the US. To simplify the process here would require some acts of Congress and our willingness to let go of the benefits we feel this complicated tax system provides.
Over in the UK, Alex Kirkley doesn’t have to do anything to reconcile the taxes on the money he earns from his employer throughout the year. There’s no return. Nada.
“It’s pretty much settled by the employer with the government,” said Kirkley, who lives in Manchester, England. “They may regularly check to see if you’re in the correct tax bracket if you’ve had a promotion. That all gets sorted automatically by payroll teams.”
The UK uses a Pay As You Earn system, where taxes are deducted from your paycheck, similar to how it’s done in the US. But the UK system “aims for more precise withholding” than what’s possible in the US “because of various complexities,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center.
Read more: What is withholding tax?
One of the biggest ones is the married filing jointly tax status. In the UK — along with many other countries worldwide — each individual is taxed separately, regardless of their marital status. That makes it easier to estimate precise tax withholdings because your spouse’s earnings don’t need to be taken into account to determine your tax rate. For married couples in the US, their combined income is what determines which tax bracket they fall into.
Another factor muddling our tax system is the various credits and deductions we can claim.
“We run a lot of social policy through the tax code for a variety of reasons,” Muresianu said.
While other countries may have designated government agencies for administering social welfare programs run off of tax dollars, the US instead provides assistance in the form of refunded tax credits.
For instance, many countries have universal healthcare systems. But in the US, healthcare insurance for working-aged people is privately run. To help taxpayers with these expenses, there is a tax deduction for contributions to health savings accounts, a tax credit for those enrolled in marketplace coverage under the Affordable Care Act, and a tax deduction for out-of-pocket medical expenses.
Take also the earned income tax credit (EITC), introduced in 1975 to provide assistance for lower-income citizens.
Folks eligible for the EITC may not have any reason to file a tax return because they earn so little they have no tax liability. This tax benefit can literally put money in poor people’s pockets, but the credit must be claimed through the tax system.
“While the tax code has become more and more complicated, in some ways, it’s become more beneficial to taxpayers,” Holtzblatt said. “There’s more types of assistance available.”
That extra help isn’t just targeted at lower-income people, either.
Many lawmakers and special interest groups have pushed tax breaks to encourage certain types of behaviors such as saving for retirement (saver’s credit and deduction for traditional IRA contributions), owning a house (mortgage interest deduction), and giving to charity (charitable deductions).
In many cases, these have become sacred cows.
Just look at the cap on the sales and local taxes deduction, or SALT, under the Tax Cuts and Jobs Act in 2017. Politicians representing states with high property taxes, whose residents got the biggest benefit from the deduction, are still trying to remove the limit.
“We would all want a simpler tax code to reduce the burden, the cost, and the mental anguish of figuring out our taxes,” Holtzblatt said. “On the other hand, simplification might require losing some of the benefits you receive through the tax code.”
And tax prep companies are similarly interested in continuing to make money off of our complex tax system.
This photo shows the Internal Revenue Service (IRS) headquarters building in Washington, April 13, 2014. (AP Photo/J. David Ake, File) ·ASSOCIATED PRESS
One area where simplification has been stymied — even worldwide — is around freelance or gig work.
In Sweden, de Pedro used an accountant to do his taxes when he worked as a freelancer. The process sounds familiar to US self-employed workers. He had to gather his receipts and invoices to determine how much tax he needed to pay his government.
“It’s a much more manual process,” de Pedro said.
Same thing for Kirkley in the UK, who is the stadium announcer for Manchester City Football Club, a contract job. He also uses an accountant to file a tax return for the income he earns from that side job, as well as what his wife earns from her own business.
“I pay for somebody to do it properly because I would be useless at it,” he said.
Kirkley also keeps money aside during the year to make sure he can cover any taxes he may owe, just like many Americans who are self-employed or have side hustles.
“Being able to pre-populate a return from the government with deductions, capital gains, or self-employment income, that’s a very difficult hurdle for countries to overcome because that information is not independently available to the tax authorities,” Holtzblatt said.
“That’s always going to create a demand for third-party paid preparers,” she added.
Still, the US can simplify its tax system in ways that other countries have already succeeded. And it’s recently made steps to do so.
The TCJA in 2017 doubled the standard deduction and curbed several itemized deductions that “dramatically reduced the number of taxpayers who would choose to itemize from about like 30% to 10%,” Muresianu said.
Not having to itemize in and of itself simplifies taxpayers’ tax-filing experience. Additionally, many of those taxpayers may also be among the 30.3 million Americans eligible to use the IRS’s Direct File program, which lets you submit a return straight to Uncle Sam at no cost.
The program debuted last year in 13 states and has expanded to 25 states for this tax season. It now can automatically import some of your W-2 information directly from the IRS and process returns that claim more tax credits. Still, it’s a far cry from what Sweden provides.
“We’re talking about different tiers of simplifying the filing system and Direct File is at that first tier,” Holtzblatt said.
The next step would be to send taxpayers a pre-populated tax return, and the third and highest tier of simplification would be for the IRS to also calculate how much taxpayers owe. To do that would require some legislative changes, Holtzblatt said, mandating companies to provide 1099 forms that report interest, dividends, and other income to the IRS much earlier than they do now.
“We’re far away from step two and really far away from step three,” Holtzblatt said. “But step one is a big step relative to where we were before.”
Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on X @JannaHerron.
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