WASHINGTON -- Tax cuts have costs. This year's reduction in capital gains rates may require some taxpayers to fill out 13 more lines on next year's forms - a new level of complexity sure to be a boon for professional tax preparers but a bane for people who fill out their own returns.
The Internal Revenue Service has started work on new forms that incorporate the tax cuts enacted this year. It posts the drafts on its Web site so tax preparers can review them and offer advice.
The draft of the new form for reporting capital gains and losses grows from 40 lines to 53 lines, as it walks taxpayers through new rates for capital gains and dividends.
An earlier IRS analysis estimated 15 million people will be affected by the change in capital gains rates. People will have to use the form if they sold stock, held mutual funds or received dividends in 2003.
William Cafero, senior manager at Ernst & Young, said some investors who never used the form before and don't think of themselves as stock traders will find they have to figure it out.
"Taxpayers' lives are going to get a little more complex," he said.
The new document is particularly long because the tax rate on capital gains changed on May 6, 2003 - a date in the middle of the year. The extra lines help taxpayers calculate their capital gains at the old 20 percent rate until May 5, and at the new 15 percent rate that began May 6.
Rick Rodenbeck, managing director of a division of H&R Block, said he tested the draft form as an exercise. At the end of the 53 lines, the form delivered the same tax bill he had calculated himself, but he couldn't exactly explain the form's math. "It appears to get you to the right answer," he said.
Lawmakers did not pick May 6 out of thin air. House Republicans who first proposed the capital gains tax cut wanted to enact it quickly, but they wanted to be sure that their actions would not disrupt the stock market.
Ways and Means Committee Chairman Bill Thomas settled on May 6, the day his committee first debated the bill. "It means that people aren't taking advantage of the system," said committee spokeswoman Christin Tinsworth.
The machinations have some observers shaking their heads.
"This is a tax break that's going to cost you more in compliance and computing burdens - and, I don't know, maybe you'll have to buy a computer - than the break's going to give you," said Christopher Bergin, director of Tax Analysts.
The new tax law made one thing easier. A bigger standard deduction for some married couples means some will not have to go through the hassle of itemizing their deductions.
But other changes mean added complications. The IRS anticipates:
- About 27 million taxpayers who received a check this summer as an advance child tax credit payment will have to fill out a "relatively simple" worksheet.
- Over 20 million taxpayers will have to adjust to a new system for reporting dividend income.
- About 10 percent of small businesses will have to spend more time keeping records to take advantage of tax breaks on newly purchased equipment.