ACCOUNTING Tax code changes benefit payers, yet with complications

Americans' finances have gotten more complicated, which affects the tax code.
CBS MARKETWATCH
SAN FRANCISCO -- Some American centenarians may remember that death and taxes weren't always certain.
Ninety years ago this month, President Woodrow Wilson signed into law the federal income tax code. It wasn't the first -- for instance, an income tax was levied to fund the Civil War -- but it was the one that stuck.
And ever since, the tax code has gotten more complicated. The printing of the 1913 code and related documents took 400 pages. Now, it takes 55,000 pages, according to CCH Incorporated, a Riverwoods, Ill., company that has been a publisher of the tax code since 1913.
Things won't get any easier come April. Tax accountants say recent changes in the law will likely stump many Americans next year.
"They made the law more complex; there's no question about it. A lot of mistakes will be made on tax returns," said Doug Stives, a certified public accountant and partner with The Curchin Group in Red Bank, N.J.
Still, while he doesn't think the tax code will ever get simpler, Stives said all those changes add up to tax breaks.
"They're throwing things at us that mean people are going to pay less tax," he said. "That makes taxpayers happy."
Sources of confusion
For instance, taxpayers may receive 1099 forms from their mutual funds that include a slew of dividend categories.
"It's not new, it's just the number of types of dividends are mind boggling," Stives said.
Those include qualified dividends which are taxed at either 5 percent or 15 percent -- new, lower rates that will ease many Americans' tax burden -- as well as unqualified dividends taxed at regular income tax rates as high as 35 percent and capital-gain dividends, which can offset capital losses but are then taxed at a rate not exceeding 15 percent, Stives said.
Two other possible 1099 categories include nontaxable dividends, if the mutual fund invests in tax-free securities, and return of capital.
"Something as simple as a 1099 is going to blow people away this year," Stives said.
Another source of potential confusion: Schedule D, the form used for reporting capital gains. This year's schedule will likely have 53 numbered lines, up from 40 last year, experts said.
A midyear tax-law change will necessitate two separate calculations on the form, and some dividends must now be reported on the form. People receiving dividends may now have to file Schedule D and the long tax form, when before they could use the short form.
"That's complexity that a lot of Americans are not going to relish," Stives said, though the 5 percent dividend tax rate available to some should make them happier.
Satisfying constituents
One reason tax laws have gotten more complex is because Americans' finances have. But another contributing factor is that lawmakers have realized how useful tax law can be to affect change and satisfy constituents, said Mark Luscombe, principal analyst for the federal and state tax group at CCH.
Originally, tax was solely a source of revenue.
Now, "we're trying to do things like encourage homeownership through the code," Luscombe said. "We're trying to help people with education through the code, help people with retirement through the code, help the poor with the code.
"Constituents come to Congress with their needs, and Congress tries to meet their needs, and one way to do that is tinker with existing laws. Tax laws being on the books become something to tinker with."
All that tinkering means more Americans will need professional help with their taxes. Those who can't afford such help may feel the system is increasingly unfair.
In 1913, very few people needed a professional. The tax rates ranged from 1 percent to 6 percent, and only those who earned more than $3,000 (single) and $4,000 (married) were required to file.
With an average income of about $750, not many people filled out a tax form, but when they did, they used the Form 1040. Then, it was three pages long plus a page for instructions, according to CCH.
Now, the form has dropped to two pages, not including attached schedules, but the instructions go on for 126 pages (32 pages for the 1040EZ).
About 360,000 tax returns were filed in 1913 compared with the 130 million filed last year, according to the Internal Revenue Service.