New IRS Form for Capital Gains Costs Taxpayers Time

Taxpayers have a new curse this year as the filing deadline approaches: “Evil, thy name is Schedule D.”

The monster was created by the 1997 tax law, which lowers the top capital gains tax rate to 20% for individuals but requires more paperwork.

Schedule D, a detailed explanation of capital gains and losses, is a 54-line work sheet this year, having ballooned from just 20 lines last year.

“The changes are immense. The Congress could not have made it any more complicated,” said Bruce Hanson, a tax preparer with Hanson Bookkeeping and Tax Service in Huntington Beach. The new law increased both the number of capital gains tax rates and the number of reporting periods.

Hanson estimated that his preparation time for tax returns requiring Schedule D increased by 15 to 30 minutes. “There’s also no question that there will be more extensions this year,” Hanson said. “We couldn’t begin filing them until the end of February.”

The reason, he said, was because the new tax law was passed so late in 1997. As a result, the Internal Revenue Service did not begin accepting the new Schedule D forms until after Feb. 14.

Previously, taxpayers reporting small amounts of capital gains distribution--less than $300--could do so directly on line 13 of their 1040 forms. Now they must file the separate work sheet.

The IRS estimates that 1.4 million taxpayers nationwide will be affected by the revamped capital gains reporting.

“It will definitely affect a lot of us here in Orange County,” said David Morse, a certified public accountant with Paddock, Jones, Morse in Newport Beach. “Here you have a lot of taxpayers who have some disposable income and who have mutual funds.”

Half of Orange County adults own stocks or shares in stock mutual funds, according to a 1997 Times Orange County Poll. Last year, of those who made less than $50,000 a year, 29% held stocks or stock mutual funds. That number went up to 56% for those with incomes between $50,000 and $99,000; and 74% of those earning $100,000 or more.

“The pro is that, with the Schedule D for mutual funds, you potentially have a lower rate of taxation,” said Chris Conley, spokesperson for the Southern California District of the IRS. “The con, of course, is having to do the form. . . . There is no question, you have to do it.”

The advantages of the new tax code, though, far outweigh the inconvenience, Conley said. For example, homeowners benefit. Some individuals who sold their homes last year can claim the first $250,000 of gains as nontaxable. For married couples, the first $500,000 is excluded. That could translate into major breaks for residents of Orange County, where the median housing price is $241,000.

But filers can reap the benefits only if their tax returns are done correctly. Already the federal government has reported a huge number of returns improperly filed, and the agency is in the process of sending out nearly 1 million letters about forms that need to be refiled with the Schedule D attachment.

Tax returns with capital gains that reach the IRS without the form are considered incomplete and will be subject to a failure-to-file penalty. Additional charges of 5% of the unpaid tax a month can be levied for as many as five months.

“It adds up,” Conley said.