The hardest thing in the world to understand is the income tax.
Albert Einstein, famed physicist and author of the Theory of Relativity.
Witty but not entirely true. Taxes are simple. The IRS and accountants make taxes look more complicated than they are. In many cases, you can handle your basic taxes yourself, with a very modest effort on your part. Sadly, the official IRS publications and “consumer” tax books are of little help. Just open one of them:
- When you live in a low-tax state and work in a high-tax state…
- If you receive payments on an installment sale of your residence…
- When you have a net operating loss carryover from a previous year…
Do you find such tax tips relevant? See, this is exactly the problem with all those “helpful” publications. They are overloaded with useless technical details and fail to explain the simple ideas and rules.
Why so much complexity?
Yes, the tax laws are incredibly complex, and it’s getting worse every year. We’ve got special treatment for homeowners and for self-employed, for investors and for the elderly, for disabled and for students – all in the name of tax fairness. Hunting for the tax breaks (also known as tax deductions and tax credits) creates a lot of headaches for the taxpayers and revenue for the accountants. Since the IRS needs to verify our claims, we have to deal with the possibility of an IRS audit. In turn, audits require massive expansions of the IRS staff and budget – all paid through additional taxes, of course!
To make things worse, politicians learned that new tax breaks can win them votes. Besides, they want more breaks for themselves too! So, here we are in the 21st century: totally confused by the tax law, overpaying our taxes, overpaying accountants (yes, I’m one of them) to fill out the stacks of forms, wasting time and money, arguing about fairness, and still paying the government to maintain and worsen the whole mess. Nice job!
How much knowledge is enough?
I like an analogy with car maintenance. One extreme is the people who always fill up at “full service” stations and never look under the hood. There is nothing wrong with it. In fact, those folks manage to keep their hands clean from dirt and their minds clean from auto blues. Bit it costs them money, and they should be careful to never leave the city limits. The other extreme is hardcore do-it-yourselfers who spend entire weekends in their garages. Sure, they save money, but at what cost?
As always, the challenge is to find the right balance. Only you can decide how much time you want to spend learning about your car and servicing it yourself rather than paying someone else to do it for you. Only you can decide how much (or how little) you want to know about taxes to be comfortable with them. If you’re looking for some common-sense information to get you started, this site is the place. Enjoy!
Tax complications
There are many situations when basic understanding of taxes is not enough. If any of the following applies to you, I’d recommend that you consult a tax professional.
- Business or self-employment income; estimated payments
- Buying or selling a home
- Capital gains and losses from investments
- Investing in Real Estate
- Lump-sum distributions from retirement plans
- Marriage or divorce
- Casualty and/or theft losses (this probably includes the previous item)
- Foreign income
- Death
- Problems with the IRS