There may be no surprise that the federal income tax is confusing but a new report done at President Obama's request is detailing just how confusing and contradictory it is.
Unveiled at the White House today and produced by the President's Economic Recovery Advisory Board, an independent group not tied to the Obama administration headed by former Federal Reserve Chairman Paul A. Volcker, the 118-page report outlines area after area where it seems the tax code is as confused as the people who try to follow it.
"What the report makes clear is the enormous complexity of the tax law for the typical taxpayer," said Harvard economist Martin Feldman, who headed the panel of the board that produced the study.
The report said seemingly simple definitions in the tax code go one way in one part of the code and another way in another part, resulting, "in errors and mistakes." The report, while offering no recommendations for detailed fixes, suggested there is a need to simplify the tax code, improve compliance and deal with some problems in corporate taxes.
Among problem areas the report cites:
Children's expenses -- As Congress added deductions for credits day care and education and special rates for unmarried individuals with child rearing responsibilities, no one coordinated definitions. The result is a nightmarish frustration for the 50 million taxpayers who can benefit and often have to separate determinations of income, head of household status and eligibility of a child for each credit.
It cited a typical middle-class family with two teenagers 16 and 19 years old with the eldest away at college, but supported by their parents. The family can claim two dependent credits for children, a $1,000 child tax credit for the 16-year-old, and possibly an education credit for some of the 19-year-old's college expenses.
Getting all those credits means navigating two pages of instructions and a checklist for claiming dependents, and a separate two page worksheet for determining the 16-year-old's child tax credit. Finally the parents have to consult another Internal Revenue Service publication and make three separate calculations to see which of three potential college expense credits they could take for their oldest child.
The forms get more numerous and complicated for poorer families who can qualify for additional credits, or for divorced or separated parents living with their children. In addition, credits available for lower income children each phase out at differing income levels.
"These rules are difficult to understand and follow, particularly for families in complicated living situations -- households that include extended family and multiple generations or that are headed by an unmarried, separated or divorced parent," said the report. It called the lack of coordination "burdensome," and suggested some of the programs need to be consolidated together so they are easier to understand.
Savings, health care and retirement: The more than 20 ways to save for education, retirement and medical expenses are just too complicated, said the report. So complicated, in fact, that they are backfiring and reducing workers' willingness to sign up.
"We heard that individuals can be intimidated and confused both by the sheer number of accounts to choose from and by the fact that each account is governed by a different set of rules regarding eligibility, contribution limits and when money may be withdrawn," the report said.
It also said the program's structure is out of kilter, with many of the advantages of government programs tilted toward higher income people who already are likely to save, instead of toward more middle class families who need to put more money away.
Small business: The report said various government regulation laws make business use of a home too complicated and too stringent, even when a business is clearly home-based. It cited as examples laws or rules that require allocation of phone use by phone number.
It also says record keeping requirements may be overly stringent.
The report goes now not only to President Obama but to Congress, which in the past has pretty much ignored some similar reports.
Volcker said today he is hopeful that by listing options rather than recommendations, this panel could have more of an impact.
"We hope Congress will draft some administrative remedies that will help," he said.
Take the first steps to building your portfolio.View Course »