I wasn’t planning to do it again this year, but in the end I signed up. If I had been planning better, the work for my re-certification would be mostly done by now. But I’ve yet to begin. Too much traveling and playing. I knew this of course. It is the reason I wasn’t planning to re-up. But the new guy running our local program reached out, assured me there would still be time when I returned from Europe. Assured me the need was critical. He didn’t assure me that the IRS would be any less rigorous in its demands. We both know better than that. Still, this past Tuesday evening I showed up for the first orientation meeting and met everybody else. They are all further along than I.
Assuming I catch up, once again I’ll be working with our regional VITA (Volunteer Income Tax Assistance) program preparing tax returns for our local poor and immigrant population. It will be my third season. It is gratifying work, even if the training ahead in the next couple of weeks is daunting.
The work, and the training the IRS requires for certification, has given me an inside look. What virtually every volunteer agrees on is, the tax code is far too complex.
The tax code is complex precisely because it provides goodies for everyone.
The rich (and the thrifty but not so rich) get the favorable treatment of capital gains, dividends and tax-free municipal bonds. Not to mention the specific tax breaks for specific industries. This being the reason our corporate tax rate at 30% is one of the highest in the world but the effective corporate tax rate is only 12%, one of the very lowest.
The middle class get deductions for IRAs, 401ks, mortgage interest, real estate taxes, children and dependents.
The poor also get exemptions for children and dependents, along with the child tax credit and earned income tax credit. Tax credits are especially beneficial things. Most deductions reduce your tax liability only to the extent you have a tax liability. Then they become worthless. Tax credits can provide refund dollars in excess of taxes withheld and beyond any tax liability. That is, if you owe $500 in taxes and have a $1000 tax credit, not only is your tax liability wiped out, the government will give you the remaining $500. The take away here is, even if you are sure you don’t owe any tax it can be worth it to file.
I use the term ‘goodies’ above in this sense:
The core reason for income taxes is to raise revenue to operate the government and it’s services. But congress was quick to realize that once in place the federal income tax could also be used as a tool for social engineering. This is done by providing incentives in the form of deductions for certain behaviors.
- You want more people to have kids? Child tax credits and exemptions.
- You want more people to own homes and the social stability that provides? Deductible mortgage interest & RE taxes.
- You want people to invest and grow the economy? Preferred rates on dividends and capital gains.
- You want people to give to charity? Charitable deductions.
These incentives, what I call goodies, are not about keeping your own money. They are not about raising revenue. They are about doling it out to those who behave in a “proper” way.
In the world of VITA volunteers I hear little talk about the tax system being “unfair” but lots of conversation about it being far too complex. Indeed, as I prepare returns for folks I frequently ponder how insane it is to expect the average taxpayer to wade thru it. I guess that’s why the IRS support VITA programs.
Most all volunteers (regardless of political leanings), myself included, favor some version of a simpler, flatter tax that sweeps away deductions in favor of lower rates. Don’t hold your breath, and even if it were to happen it won’t last. Congress would promptly begin creating new goodies to influence social behaviors, reward supporters and to garner influence.
Of course PAID tax preparers like our complex system just fine. I feel about them much the same as I do about Financial Advisors. Better to learn to do your own taxes or seek out the free help offered by your local VITA. Volunteers are well-trained, each return is double checked and the work is respected by the IRS. Oh, and it’s free.
It may surprise you, but I also give high marks to the IRS:
- The training they provide is excellent.
- The focus of this training is accuracy.
- The IRS is not out to screw anybody, indeed a regular refrain is our obligation as preparers to seek out every deduction, credit and benefit to which the taxpayer has a legal right.
- They have done an excellent job in taking a nightmare tax code and reducing it to a series of simple forms that actually make sense. At least after some training.
- They are very focused on weeding out tax cheats. Since cheats are taking money out of the pockets of all their fellow taxpayers, including me, this is as it should be.
- and for those of us warped enough to enjoy playing with taxes, it’s fun!
If this kind of work appeals to you I’d encourage you to check into it. As our site leader used to say, if nothing else it will give you some great insights and stories. But be aware, sometimes there is not a lot in the way of appreciation from your clients. I’ve had people bitch at me throughout the entire process. That’s tough to take at any time. But when you are providing a free service it is especially grating. I conclude that one of the reasons some, certainly not all but some, people are poor is a lack of basic social graces. Dealing with it is good Zen practice.
That said, I’ve also had many very appreciative clients. Knowing you’ve helped someone with what might have otherwise been an overwhelming task and spared them from the clutches of store-front paid tax preparers is a great feeling.
The work has also given me a greater insight into and sympathy with the working poor. The sheer industriousness of some of our clients is inspirational. Their stories, both spoken and as revealed in their taxes, are compelling. After a time, it’s not hard to tell who is on their way out of poverty and who will be spending their life mired in it.
Of course, the training also provides insights into my own taxes and possible strategies. Since I’m now retired, I can enjoy what Mr. Money Mustache has called “the lovely low taxes of early retirement.” Let’s take a look.
Over the years Mrs. jlcollinsnh and I have built up a nice stash in our retirement accounts. As we all know, these accounts are not tax-free, they are tax deferred. Big difference. And the IRS requires that we begin withdrawals and paying taxes on them once we turn age 70. We could just wait, but tax rates are low now. We’d like to get these accounts shifted in to Roth IRAs at the lowest cost possible. Roths earn tax-free, withdrawals are tax-free and they can be passed to heirs tax free. A pretty good deal.
Since we’re married we file as “Married Filing Jointly,” the most attractive filing status. (The government rewards marriage. See above.) This means we can have income of up to $70,700 and still be in only the 15% tax bracket. But it gets better:
- $70,700 income
- $11,900 standard deduction
- $11,400 exemptions. ($3800 x 3 for the two of us and our child.)
- $94,000 total.
This means we can have up to 94k in income and still pay only a 15% marginal tax rate. So here’s what we do:
Take my wife’s income (she still works) and add our taxable interest and dividends. Subtract that total from 94k. Shift that remaining amount from regular IRAs into our Roths. Pay only 15%. That’s a deal I can live with. Plus I understand our government can use the money right now.
Serving with VITA helps my community and it helps me. I’ll be challenged, learning and having fun doing this again this year. Looking forward to it. Just wish I had the re-certification behind me!