The following is an excerpt from OpinionJournal.com’s “Best of the Web” written by the editor, James Taranto.
Isn’t That Enough?
“National Journal Hires Richard Just as Magazine Editor”–headline, NationalJournal .com, Feb. 25
Question and Answer–I
- “Why Are We Still Debating Climate Change?”–headline, CNN, Feb. 24
- “Coldest Winter in More Than 30 Years”–headline, Star Tribune website (Minneapolis), Feb. 24
- “The Period of No Global Warming Will Soon Be Longer Than the Period of Actual Global Warming”–headline, Forbes, Feb. 24
8960 or Fight!
Some TurboTax customers are mad at Intuit, maker of the popular tax-prep software, because they’ve finished their returns but are unable to file. Their anger is misplaced. They should blame the Internal Revenue Service, along with the 111th Congress and President Obama for enacting and signing the tax increase with which TurboTax can’t yet comply. (They could also blame George W. Bush if they’re in a jocose frame of mind.)
At issue is ObamaCare’s new 3.8% “net investment income tax.” It took effect Jan. 1, 2013, so that taxpayers are encountering it just now as they prepare their returns for last year. In effect, it applies the Medicare payroll tax to interest, dividends and capital gains.
But it doesn’t apply to all such income. If your modified adjusted gross income is under $200,000 (or $250,000 for a married couple), you don’t pay the tax at all. Further, if your modified AGI is above the threshold but your noninvestment income is below it, the tax is applied on the difference between your total income and the threshold.
If that’s hard to follow, here’s an example: Suppose you’re an unmarried taxpayer with a modified AGI of $210,000 and investment income of $20,000. Your net investment income is $10,000, the portion of your investment income above the total income threshold of $200,000. Your net investment income tax is 3.8% of this sum, or $380.
If you owe net investment income, you have to complete a single-page Form 8960 to calculate your modified AGI and the tax. But the form’s brevity belies the new tax’s complexity, as tax expert Tony Nitti wrote in a Forbes.com piece last month:
When we saw that this new, complex area of the law would ultimately be computed on a one-page form, we anticipated that the meat of the computation would be done off-form in worksheets provided by the instructions. And that’s exactly what happened. But that shifts the onus back to us as tax advisors to make sure our inputs are correct, which means we must understand the nuances of the final regulations.
Nitti wrote that Jan. 7, the day after the IRS released its instructions for Form 8960. But those instructions are not final; they include a cover sheet that warns: “DRAFT–NOT FOR FILING.” Taxpayers, tax advisers and tax-prep software developers are still awaiting the final instructions.
Hence the TurboTax users’ frustration. “Form 8960 was realeased [sic] by the IRS on 1/24/14 but Turbo Tax keeps delaying it’s [sic] release every week, for another week!” a user complained last week on Intuit’s TurboTax AnswerXchange online forum. “I’m calling BS on this as they have had access to the draft form for months! When is TT actually going to make this form available and stop extending the dates? And why should we keep waiting for this form when other providers already have it available?”
Actually, Intuit has incorporated the form into its software. But for the moment, it won’t allow users to complete a return that includes an 8960. An AnswerXchange moderator answers the query by explaining that in response to complaints from users–some of whom have switched to other tax-prep software to get the job done–“we will enable the filing of Form 8960 late on Feb. 26 (or possibly early the next morning) based on draft instructions.”
But the moderator warns: “If you make the decision to file now, you may need to amend your return if the final instructions produce a tax liability different than the liability computed using draft instructions. You assume responsibility for checking for product updates to determine if the final instructions require an amended return and for paying any additional tax and interest.”
It’s a no-win for Intuit and for impatient TurboTax users. By preventing the filing of returns that include an 8960 until the IRS releases the final instructions, the company was protecting its customers from the risk of misfiling–and itself from the backlash that would surely ensue if many filers end up having to amend their returns as a result. The company still ended up with a backlash, its response to which could yield another backlash if the final instructions turn out to be different enough from the draft that a large number of users have to amend their returns.
With the filing deadline not until April 15, why would a taxpayer be eager to file in February? Presumably because he is due a refund and wants his money back as soon as possible. By contrast, if you owe money to the government, it is in your interest to wait until the deadline–the latest date on which you can file without paying interest or penalties on taxes underwithheld.
As we noted last year, taxpayers experience a refund as a windfall, but that’s an illusion. In reality overwithholding of taxes is an additional tax in the form of an interest-free loan to the government. By delaying its final instructions and thereby creating a bottleneck that prevents some taxpayers from filing early, the IRS has effectively imposed a new tax.
There’s no reason to think that’s the intent behind the delay, for which bureaucratic inefficiency seems to us a sufficient explanation. But given that the new tax was enacted years in advance–ObamaCare became law March 23, 2010–the IRS’s sluggishness seems especially noteworthy, and unnecessary.
It also raises a worrying question about the changes in tax law that took effect at the beginning of this year, the effects of which taxpayers will see when they file their 2014 returns early next year. The IRS is charged with administering the insurance “mandate” tax and the income-based ObamaCare premium subsidies. The latter is a considerably more complicated provision than the net investment income tax. The former may be as well, especially given the exceptions and waivers the administration has decreed to compensate for the botched rollout of the ObamaCare exchanges (and the possibility of more to come).
The reach of the mandate tax and the premium subsidies is considerably broader than that of the investment tax, which affects only the relatively small subset of taxpayers with income north of $200,000. To be sure, the IRS is one of the more efficient federal agencies, since collecting money is something government is undoubtedly good at. But the agency’s slowness in issuing final rules for the 2013 tax changes does not augur well for next year.
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