Why I do my own taxes (and why you might not)

Every year around February 1, I fire up the IRS’s Free File Fillable Forms and begin the arduous process of manually inputting all my income and expenses for the year. I have what you could think of as either a very complex individual tax return or a very simple business tax return.

It’s a very complex individual tax return since I have to fill out Schedules C and SE in order to report the income from my sole proprietorship, while most employees just have to copy the information from the W-2 their employer provides. Alternately, it’s a very simple business tax return since I don’t have any depreciation, cost of goods sold, inventory, etc. I have my income and my expenses, and essentially all I have to do is deduct the latter from the former.

Due to my low income I’m eligible for free commercial tax filing software from the IRS, but I have used the public FFFF for the past 4 years of tax preparation.

“Interview-based” tax preparation software drives me nuts

Every commercial tax preparation software I’ve used has the same model for tax return preparation: you’re asked a series of sequential questions covering every imaginable situation the tax code covers. For example, you’ll be asked a seemingly harmless question like, “did you move during the tax year?” If you answer “yes,” you’ll then be subjected to another hundred questions about your moving expenses, how far you moved, how soon after moving you started your new job, how the weather was during your move, etc.

My problem with this system is that it treats the answers to the questions as constants, when in fact they’re variables. “How much money did you contribute to an IRA this year?” is not a constant — you can contribute money to an IRA up until your tax filing deadline, well into the next calendar year. That means the system’s outputs, like adjusted gross income, are also variables. Whether you qualify for a retirement savings contribution credit, and how much it works out to, depends on your AGI. But your AGI depends on how much you contribute to qualified retirement plans! By treating these variables as constants, tax software in my experience is actively harmful for folks trying to minimize their tax bill. It offers a faux static precision for a process that is better understood as dynamic.

Free File Fillable Forms is not perfect

I personally like the IRS’s Free File Fillable Forms since it lets you fiddle with individual variables and then recalculate the resulting values (they call this function “do the math” because they think they’re cute). You’re given the option of adding virtually any of the common IRS forms to your return, inputting the values you have control over, then allowing FFFF to do all the worksheet calculations in the background, and populate your 1040 with the final values.

One problem I have run into occasionally is that while forms populate their values to the 1040, it doesn’t always work in reverse. For example, Form 8880 (Credit for Qualified Retirement Savings Contributions) will properly populate line 51 of Form 1040, but it takes as one input your AGI from line 38 of Form 1040, and that has to be manually inputted.

That sounds like a quibble, but if you don’t know about it and you do something elsewhere on Form 1040 to change your AGI (e.g. increase contributions to an IRA or other pre-tax retirement account), you have to remember to go back into Form 8880 to manually adjust it, for example if you’re trying to get your AGI below the highest-credit threshold of $18,500.

For most people in most years free commercial tax software is probably fine

Most employed folks who receive exclusively W-2 income, participate in a retirement savings plan at work, have an IRA, and might be making student loan payments are probably well-served by free commercial tax software. The earned income and retirement savings contribution credits phase out fairly quickly, so moderate-income people are unlikely to be able to claim them (unless they have a lot of kids, in the case of the earned income credit), and the standard deduction is high enough that moderate-income people are also unlikely to benefit from itemizing deductions for things like state and local taxes and charitable contributions.

Tax complexity is a payoff to the tax preparation industry

Of course, that begs the question: since most people’s tax returns are so simple they require nothing more than your W-2, your IRA contribution, and the number of people in your household, what’s the point of the rest of the lines? The point is to create a tax system so complex that people feel compelled to resort to commercial tax preparers in order to avoid the risk of audits and penalties, and to create a generalized animosity towards the payment of taxes in general. Don’t believe me? Here’s Grover Norquist of Americans for Tax Reform on tax simplification:

“This system will gradually be expanded to more and more taxpayers, and will eventually become mandatory. Income tax filing will be like getting a real property tax statement in the mail—it will become little more than paying a bill.”

To be clear, he means this as criticism, not the praise it’s rightly understood as.

Conclusion

It’s possible to hold two ideas in your head at once:

• Tax preparation is something that needs to be taken seriously and done well, especially for the self-employed and those seeking to retire early. Knowing about and maximizing the value of retirement contributions, identifying potential deductions, harvesting capital losses and gains, and rolling over pre-tax and post-tax accounts as appropriate are all appropriate strategies for saving money given the tax code as it currently exists.
• The tax code as it currently exists is deeply broken not because it incentivizes the wrong sorts of activity, but because the fact that it contains incentives for this kind of behavior at all makes tax planning occupy a disproportionate and unnecessary share of the cognitive real estate of people who could otherwise spend their time doing literally anything else.

In other words, the problem with the mortgage interest deduction is not that it drives up real estate prices and costs the US Treasury $70 billion a year. The problem is that it makes people think about the mortgage interest deduction. Eliminating the deduction and giving all the money back to taxpayers through lower rates wouldn’t just be a good idea for eliminating a distortion in the housing market; it would be a good idea so no one ever had to think about the mortgage interest deduction again.

Likewise the earned income credit has received a lot of praise, both deserved and totally undeserved, for reducing poverty among low-income workers. But it also requires a 38-page booklet of instructions for properly claiming it, primarily because of its elaborate phase-in and phase-out rules, definition of “earned” income, limits on investment income, etc. Even if you think a refundable tax credit for low-income workers is a good idea, why phase it out or place any limits on it at all? Why not simply reclaim the value of the credit through higher rates on higher-income workers, creating a kind of negative income tax for low-income workers at no net cost to the Treasury?

At the end of the day, you shouldn’t support tax simplification because your personal finances will suffer or be improved by it. You should support tax simplification because you deserve better than to build your life around optimizing your tax situation every year.