Don't Mess With Taxes

After reading over yesterday's blog entry about the expected confusion because some tax breaks were passed too late to make it onto 2006 forms, the hubby had some follow-up questions.

Haven't I trained him well? He not only reads the blog, he wants to know more about taxes!

But back to hubby's inquiries, specifically: Why didn't the IRS just wait for Congress to act before sending the forms to the printer? Wouldn't it have made more sense to hold off since so many people are affected by these tax breaks? What's the harm in waiting until final passage and pushing the delivery of the forms to the end of January or mid-February?

Ah ha! My better half has hit upon a problem found not just in the tax world, or at least in the tax-reporting world, but in all areas of life: The tyranny of the aggrieved, vocal minority.

The truth is, most people don't care about the three tax breaks -- sales taxes, educators' expenses and tuition and fees -- that were approved so late in the year (details here). Despite all the harping on the wait, and I am as guilty as anyone, these write offs don't affect most taxpayers' returns.

Most filers, in fact, claim the standard deduction. That automatically means the state sales tax write-off doesn't do them any good, since you have to itemize to claim it.

Totaling the tax forms: In 2004, the most recent year for which the IRS has complete filing data, itemized deductions were claimed on  more than 46 million returns. Of those, around 11 million listed sales taxes as a deduction.

But more than 84 million taxpayers claimed the standard deduction. No Schedule A, no long lists of expenses to add and multiply by percentages and then subtract. One number based on filing status and they're good to go.

Those taxpayers, the majority of filers, don't want to be cooling their filing heels waiting on the relatively few of us who want to list how much in sales tax we paid to our state and local governments.

These standard deduction claimants have got 1040s to file and refunds to get and spend. ASAP.

True, filers who claim the standard deduction still could use tuition and fees and educators' expenses to reduce their taxable incomes. These tax breaks technically are adjustments to income and are (or were in 2005) found at the bottom of Form 1040 or 1040A, and not on the Schedule A used by itemizers.

But that said, in 2004 there weren't that many folks who claimed these adjustments. The educators' out-of-pocket expenses showed up on 3.4 million returns. The tuition and fees claim was taken by 4.7 million filers.

When you're talking in excess of 130 million returns, the 19 million filers waiting for these three tax breaks don't really carry a lot of weight, at least with the IRS. The employees of the tax agency know that when given a choice, always opt to upset the fewest number of filers possible.

So off to the printers the forms went. Those of us who want to claim the finally-approved deductions will just have to make do.

In my defense: Allow me a closing word on the apparently inordinate focus on the expired tax credits.

For the most part, the press coverage (mine included) looked not just at the taxpayers, regardless of how many or few, who would be affected by the provisions, but on how the expired tax measures were used in the legislative process.

As I noted many, many (OK, maybe too many) times earlier, these three breaks were used as a stick to try to force passage of other, more controversial tax measures.

And that, to repeat an earlier refrain, is bad politics and worse tax policy.