Is it Okay to Cheat on Your Taxes?
If you haven't read the news, we had some staggering numbers this week reportedly about how many people in our country aren't paying taxes. In fact, in 2020 more than 100 million U.S. households or 61% of all taxpayers paid no federal taxes at all.1 At the same time, the top 10% of taxpayers paid a whopping 71% of all the federal taxes in 2020. The official numbers showed 107 million households owed no income in 2020 which was up from 76 million one year ago2, so the numbers continue to rise.
Is this 'no tax' epidemic happening because legitimately there are this many people in America who aren't making enough income with the new tax law changes installed in the Tax Cuts and Jobs Act of 2017 or are people getting smarter on how to work…some say cheat…the system to get to zero federal taxation whatsoever. Remember, these numbers don't include how much money the federal government are giving people in tax credits through their tax returns so a good percentage of those paying no tax are getting money directly from the government.
A recent poll came out around cheating on taxes and about 10% of all Americans say it is 'OK' to cheat on your taxes here and there just a little bit. That number is up 3.5% versus one year ago.3 Why is the debate around cheating heating up across the country? Part of the reason are the recent articles in ProPublica showing that billionaires including Jeff Bezos and Carl Icahn paid no federal income taxes in certain years. The $3.5 trillion reconciliation bill in Congress is expected to include increases in capital gains taxes, a higher top rate on ordinary income, a higher corporate tax rate and other measures aimed at those making $400,000 or more. But does this really solve the problem?
The current tax code is confusing, and nobody can deny this with the tax code being more than 20,000 pages. We all need to remember that tax avoidance is perfectly legal. This means using strategies within the current tax code to mitigate your overall tax liability. We also need to remember that tax evasion is illegal. Not paying the government at all or using strategies that do not fall within the tax code could wind you up in jail.
For many years, different constituencies have called for a fair tax or a flat tax which on the surface seems simple and straightforward. If the flat tax was 20%, it would simply mean you pay 20% on whatever you report for income. Somebody making $50,000 pays $10,000 and somebody who makes $500,000 pays $100,000. This, in conjunction was some sort of national consumption or VAT tax has been along the lines of what certain groups have proposed in the past. But, with the heated debate going on between Democrats and Republicans, it's unlikely something simple and smooth will happen anytime soon because taxes are such as a political bargaining chip on both sides of the aisle. Is it fair that 61% of Americans pay zero federal income tax? Is it fair that the top 10% pays 71% of taxes? There must be some simpler strategy for the future, but it's unlikely we will find a solution anytime soon that everyone can agree on that is 'fair'?
Is it 'ok' to cheat on your taxes? Absolutely not. Is it 'ok' to build strategies to minimize what you pay that are legal, legitimate, and within the tax code? Absolutely so. And, until the system changes or when it changes again, you are the one that needs to get the right people on your side to keep more of your hard-earned money.