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Tax Time Torture Worsens
Janet NovackForbes Staff
I write from D.C. about tax and retirement policy and planning.
Think you've seen it all regarding ways that tax complexity can hit the average guy? That's pretty much what Claudia A. Hill, a Cupertino, Calif., tax pro, who edits CCH's Journal of Tax Practice and Procedure thought until she reviewed the Internal Revenue Service's draft forms for tax year 2009. These are the forms taxpayers will be wrestling with next April.
One that jumped out at her was the new "Schedule L--Standard Deduction for Certain Filers." The point of the standard deduction is that taxpayers with relatively simple financial lives shouldn't have to keep lots of records or fill out Schedule A for itemized deductions. Two-thirds of the 142 million individual tax returns filed for 2007 claimed the standard deduction, which this year is $5,700 for a single filer, $11,400 for a couple filing jointly, and $8,350 for an unmarried head of household. The standard deduction was created during World War II, and an IRS spokesman confirms there's never been a special schedule to claim it before.
But Congress has now created three quasi-itemized deductions that can be claimed by non-itemizers, leading the IRS to create the 21-step Schedule L, which (in draft form) contains such instructions as: "Divide Line 17 by $10,000. Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000."
With all the tax changes (some temporary) congressional representatives have made, Schedule L is hardly the only new form for 2009. "They've always done tax tinkering, but this year they've gone too far, and there's still time for them to do more before the end of the year,'' Hill worries. One new form she deems particularly problematic is the new 14-step "Schedule M--Making Work Pay and Government Retiree Credits."
This results from Congress' creation in the February $787 billion stimulus bill of a temporary $400 per worker tax credit pushed by President Obama. That seemingly simple handout required a whole new form because Congress made the credit more complicated by denying it to the better off; it phases out for singles with adjusted gross incomes of more than $75,000 and couples earning more than $150,000. (For more on this and other phase-outs, read "So What's in the Stimulus for You? Nothing!")
In addition, Congress wanted to send a $250 check to each Social Security recipient and government pensioner but didn't want those who work to collect both the $250 check and the $400 credit, necessitating still more lines on Schedule M. (Those who file a 1040 or 1040A will use the new M; filers of the 1040EZ will complete a shorter worksheet on the back of that form.)
Hill worries that some taxpayers who prepare their own returns, and some poorly trained paid preparers, won't realize that the M has to be filed. Although workers have already received the $400 as an advance, via reduced payroll withholding, they still need to claim the credit on the Schedule M, or they'll owe the $400 back. What could worsen confusion is that the first stimulus tax credit passed in February 2008 worked the opposite way--in mid-2008 the "Recovery Rebate Credit" was sent as a check to families, and they only had to worry about it on their 2008 returns if they were entitled to a bigger rebate than they got. ("See Rebate Redo.")
What about Schedule L--the itemized deduction form for people who don't itemize? It will have to be filled out by any non-itemizers who want to claim one of three special deductions. The first is comparatively straightforward: For 2009, non-itemizer homeowners can deduct up to $500 per single person or $1,000 per couple in state and local real estate taxes paid.
The second is more complicated. As part of February's stimulus, a non-itemizer who buys a new motorcycle, auto or light truck between Feb. 17, 2009, and Dec. 31, 2009, can deduct the sales tax paid on the vehicle, up to a purchase price of $49,500. But this tax break quickly phases out once a single's adjusted gross income hits $125,000 or a married couple's AGI tops $250,000.
Note that the sales tax deduction can also be claimed by itemizers who deduct income tax, but not those who deduct sales tax, on their Schedule As, forcing the creation of an 11-line worksheet on the back of Schedule A, where Schedule B for interest and ordinary dividends used to reside. That meant the separation of A&B into two forms.
The third non-itemizer, itemized deduction? It's special provision passed last year that provides generous tax deductions to non-itemizers who claim losses from federally declared disasters occurring in 2008, 2009 and 2010. But to stake their claim, they'll have to fill out an additional form, 4684.
Janet Novack
I'm the Washington D.C. bureau chief and an assistant managing editor of Forbes. During my three decades with Forbes, I've reported extensively on taxes -- tax policy,
I'm the Washington D.C. bureau chief and an assistant managing editor of Forbes. During my three decades with Forbes, I've reported extensively on taxes -- tax policy, tax planning, tax shelters and tax evasion. These days, I also edit personal finance and fintech coverage in Forbes and coordinate outside tax, retirement and personal finance contributors to Forbes.com. You can email me at jnovack@forbes.com and follow me on Twitter @janetnovack.