To understand why the federal government currently holds a $21 trillion (and rising) debt, look no further than the front page of Tuesday’s Wall Street Journal. Its A-Hed on the day Americans had to file their taxes? “Yes, It’s Tax Day and You’re Still Doing Returns for Your Adult Children.”
From a 42-year-old marketing director who “has never done her taxes,” to the excuses she gave for burdening her parents with the task—“my dad legitimately seems to enjoy doing it”—to the 48-year-old mother whose father prepares taxes for both her and her 22-year-old daughter, the article reads like the prototypical combination of fiscal irresponsibility and helicopter parenting gone amok.
I can’t comprehend, let alone sympathize with, this behavior. I’ve always prided myself on attention to detail in my own budget and spending. Upon entering the working world, I decided to prepare my own taxes. Granted, I enjoy personal finance issues more than most do, but I didn’t find the process complicated—wage income, some small dividend payments, and student loan interest made for a relatively simple tax filing—and prided myself on my independence.
In time, buying a home and collecting small business income complicated my tax situation and suggested the wisdom of hiring an accountant. That said, I generally prepare a draft return well before I sit down with her. After all, if I don’t understand my own financial situation, how can my accountant offer solid advice?
Second, the experience of doing my own taxes infused my policy knowledge, and vice versa. For me, anyway, doing my own taxes illustrated the difference between “above-the-line” and “below-the-line” provisions in ways that inside-the-Beltway publications never could. (For the curious or uninitiated, “above-the-line” provisions reduce income—“the line” being Adjusted Gross Income, calculated at the very bottom of page one of the federal 1040 form—while “below-the-line” deductions reduce tax liability.)
Conversely, monitoring policy debates has allowed me on occasion to provide my accountant with a heads-up about how events in Washington will affect tax filers, and thus tax preparers like her. Last December, I read the tax bill to understand the implications of its provisions on my situation, most notably how the tax deduction for “pass-through” income would affect the small business income I report on my return.
A few years ago, I told my accountant about the “backdoor Roth IRA.” My income that year prevented me from receiving a deduction for an IRA contribution, but by contributing to a non-deductible IRA, then immediately converting those funds to a Roth, I will never have to pay income taxes on earnings from that contribution. Had I relied solely on my accountant—or a parent—to prepare my return, I probably would not have found out about that significant benefit.
Despite the potential costs it imposes on them every April 15, many Americans suffer from a sizable ignorance about the tax code. About a dozen years ago, a conversation at work revealed a colleague who didn’t understand the difference between marginal and effective tax rates. He thought that being in the 25 percent tax bracket meant the federal government took one-quarter of his income.
The federal government does not structure the tax code that way, of course. If it did, an extra dollar of income would cost thousands of dollars in extra taxes. Think about it: If your total tax rate goes from 20 percent to 25 percent upon hitting $100,000 of income, an extra dollar of earnings would cost a family $5,000 in additional taxes. ($99,999 times 20 percent is roughly $20,000, and $100,000 times 25 percent is $25,000.) The federal tax code assesses only marginal income—income over $100,000, in this example—at the higher (25 percent) rate. But my colleague had never thought about it, despite having a wife, mortgage, and two kids, and working as a lobbyist, including on tax issues.
For the record, I believe in paying taxes, and have the track record to prove it. When I won a March Madness pool in 2005, I dutifully declared $482 in gambling income the following spring. But I also don’t believe in paying taxes I don’t owe. As the old saying goes, “A fool and his money are soon parted.” This makes the people in the Journal article willing to have their parents manage their money and their taxes for them, well, you know…