How to Dismantle an Ugly IRS Worksheet

February 27, 2015

In filing my own taxes, the most difficult part to calculate has always been the Qualified Dividends and Capital Gain Tax worksheet. I often have to do it several times in order to make sure I did not mess it up. And I work for Tax Foundation! I have, in fact, even checked the programming of this worksheet for the Taxes and Growth model. And I still have to triple-check it every time!

The difficulty of the worksheet is not the fault of the IRS. If anything, the IRS put a very difficult concept into a one-page worksheet. But even with the worksheet’s good design, it’s still 27 lines. That’s because the underlying tax code it deals with is not elegantly designed.

The problem for the IRS is that we have two different sets of progressive rate schedules. One of these is on most kinds of income, and another of these is on qualified corporate dividends and capital gains. There are seven and three brackets for each of these kinds of income, but the cutoffs for the brackets are based on the combination of both kinds of income. In other words, more wage income could push you into a higher dividends bracket and vice versa.

This week I outlined how a whole bunch of the tax code’s worst problems ultimately come back to the lack of a concept called corporate integration. Simply put, the problem is that taxes on corporate shareholders are awkwardly split into two separate parts, the corporate income tax and the individual tax on dividends.

The problem of corporate integration is also the reason for the separate dividends calculation, and the awkward worksheet I described above. If everything was moved to a simpler one-part tax, this worksheet could be folded in to the rest of the tax calculation and dividends could be treated like ordinary income.

Kyle Pomerleau has written a new Tax Foundation report about the ways that other countries, like Australia, have handled the concept of corporate integration well. It is worth a look for anyone who would like to simplify the tax code.

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