WASHINGTON – Taxpayers working feverishly to meet the April 15 filing deadline can take some comfort knowing they are not alone when it comes to scratching their heads over this year's forms. Tax returns are getting more complicated.
The government estimates that the average taxpayer filing a typical tax return with itemized deductions and income from interest, capital gains and dividends, has to spend 42 minutes more than last year doing the math and paperwork.
The total estimated time to finish these common forms is 28 hours and 30 minutes.
It is not only frustrating, but economically counterproductive, said David Keating, senior counselor for the National Taxpayers Union (search) and author of a new study on tax complexity.
"This is something that hobbles the nation's productivity because we have a lot of very talented people filling out paperwork," he said. "It's a real deadweight in our economy."
Even the simplest Form 1040EZ (search) tax return takes 3 hours and 43 minutes to complete.
Some of this year's paperwork burden stems from changes in the taxpayers' favor, such as new laws that reduced the rates on capital gains and dividends and increased the child tax credit. The Internal Revenue Service (search) reported Wednesday that the average tax refund increased 5 percent this year to $2,090.
Occasionally, taxpayers find they have to complete, only to discover their work leads to a dead end.
To test for alternative minimum tax liability, for example, the average taxpayer can spend 3 1/2 hours filling out a worksheet only to find out no extra tax is owed. The alternative minimum tax prevents wealthy taxpayers from sheltering too much income. Increasingly, however, it affects more middle-income families.
The paperwork estimates do not capture time spent in tax planning while making financial decisions, Keating noted. "It's a year-round worry you've done something the tax stupid way, not the tax smart way," he said.
To cope with the burden, taxpayers turn in droves to a professional or a software program to do the work, the National Taxpayers Union study said. More than 88 percent of taxpayers have used a paid professional or purchased tax software so far this year.
The popularity of tax software shows up in IRS statistics that measure a 20 percent increase this year in taxpayers using home computers to file electronically.
Even the professionals rely on software.
Kathy Burlison, director of tax implementation at H&R Block (HRB), said the software is particularly helpful with this year's capital gains tax calculations. Capital gains can be taxed at multiple rates this year, depending when the asset was bought and sold.
"We are all grateful for good software. It's not a calculation we'd want to be making over and over on our own," Burlison said.
H&R Block wrote its own software program to break through the complexity in education tax credits and deductions. The education calculator prevents taxpayers or tax professionals from having to fill out their tax return as many as four different ways to find out which yields the lowest taxes.
Joseph Anthony, an enrolled agent who prepares tax returns in Portland, Ore., said he does his by hand every year as an educational exercise before turning to the computer.
He said he has seen the complexity rise with each of President Bush's tax cuts, and he blames the firepower of modern computers for making the complications possible. Tax cuts passed during Bush's administration start and stop, phase in and phase out, and apply to only parts of the taxpaying population.
"I blame Intel partly for the complexity of tax returns," Anthony said.