Tax Refunds....Delayed???

Tax season is once again upon us. By this time, most people (including myself) have already counted the ways to spend their tax refund. There are many wonderful uses for it. You can be practical and pay off some debt. Another practical use is rolling that refund into your 401(k) or an IRA. But you also have the option of splurging for that new HD big screen TV or a new car. Choice is what makes America great. But this year, a great number of Americans are going to have to wait a little longer to spend that money.


The Alternative Minimum Tax (AMT) has been around since the Tax Reform Act of 1969. The original idea behind it was sound. There were over 150 very wealthy households that too so many tax credits that they didn't owe anything to uncle sam come tax time. For a time, the AMT only punished the most wealthy of us. But over the years, as tax cuts have come along and salaries have risen, the AMT has become one of the bigger hobgoblins of the tax code. Each year it is affecting more and more people. In 2006, it affected about 4 million tax payers. In 2007, it could affect anywhere between 4 and 20 million taxpayers. And by 2010, that number could be as high as 1 in every 5 taxpayers. The clever idea that originally was affecting the richest of the rich would begin to target the middle class.

So at the end of 2007, Congress took action. Unfortunately, their actions came a little too late. The IRS had already created, refined, and tested the AMT forms by the time that Congress has implemented a fix. This will cause the IRS delays and ultimately delay tax refunds for a large number of people. If you file any of the forms below, you will likely be affected:

Form 8863 Education Credits
Form 5695 Residential Energy Credits
Schedule 2, Form 1040A, Child and Dependent Care Expenses for Form 1040A Filers
Form 8396, Mortgage Interest Credit
Form 8859, District of Columbia First-Time Homebuyer Credit

With no disrespect to the other 3 forms, the 2 forms that will affect the majority of Americans is the Educations Credits and the Child and Dependent Care Expenses. The Education Credits will delay refunds for both parents and students putting themselves in college. The Child and Dependent Care Expenses are for working couples who need to pay for daycare expenses for 1 or more children.

Early projections indicate that these 5 forms could affect over 13 million tax refunds. The IRS is hoping to have these issues resolved by February 11th. For all the working couples, parents, and students, let us hope that is the case.

Why Overhauling our Tax System would be a Disaster

Recently, there have been a lot of politicians suggesting the idea of overhauling our tax system. The main idea that the candidates are suggesting is to completely do away with the Internal Revenue Service (IRS) and replace the very complex tax system we have now with a simpler flat tax system. While on the surface it seems like a good idea, I'll give you some reasons why this overhaul would be a disaster.

The idea of doing away with the IRS would probably make the average tax payer giddy with excitement. No more complicated forms. No more worrying about whether income is taxable or not. No more dread of April 15th. I can hear the heavenly choruses singing as I type this. However before we drop the axe on them, let us consider the consequences from a employment point of view. The IRS has somewhere in the neighborhood of 87,000 employees. I would venture to say that the complexity of the tax system creates most of the need for so many employees. Overhauling the system would probably cut out the need for about 90% of those employees. Beyond the IRS, there is the tax preparation industry to consider as well. The entire industry would be sunk. This change would also affect accountants as well. There are quite a few accountants that would be out of work because of this massive change. Is an easier tax system really worth the loss of so many jobs?

I'll readily admit, that being in the tax preparation industry myself. That the arguement above is entirely self-serving.

But my next point is not. One of the beauties of having a complex system is that Congress has a lot of flexibility in determining how to get more money for wars, roads, social programs etc. For example, to pay for a universal health care program, Congress could choose to raise taxes for people who make over 500K a year with a very small amount of tweaking to the tax laws. But if every American were paying some flat percentage of the income in taxes, the only way to get more money would be to raise taxes across the board. Now to pay for a universal health care system, Congress would have to raise the taxes of the very people who need the extra health care coverage!

My final reason for not overhauling the system is refunds. Each year when that refund check (or direct deposit) goes into your bank account, you get a new opportunity to pay off debt, buy necessity items, put money away for retirement, or just party like rock stars. With an overhauled system, those refund checks would either greatly decrease, or disappear all together. The reason for that is because most people get refund checks because they have a lot of credits and exemptions that counteract the money they've paid in over the year. But with a simpler system, there wouldn't be any more credits or exemptions and thus no more big refund checks.
I think the job loss, the loss in flexibility, and the lost of the yearly pot of gold make the price of having a simpler tax system too high to pay.