Taxes are never fun, but this year is proving especially painful. Not only did the Internal Revenue Service fail to finalize all its systems and forms until mid-February, some popular tax breaks expired in 2010.
It wasn’t until mid-December that Congress reached a compromise for legislation to extend tax cuts enacted under President George W. Bush that were set to expire at the end of last year. As a result, the IRS wouldn’t accept tax returns filed electronically until mid-February as it updated its tax guidance, instructions and software, and many tax preparers waited until that point to begin work on clients' returns.
The delay was unavoidable because of the late action by Congress, said IRS spokesman Eric Smith. "Some returns could not be actually sent electronically until mid-February."
This year's headaches reflect the increasingly complicated tax code and contentious debate over tax legislation, which leads to last-minute legislation with short-term compromises. In the near term, lawmakers struggling to agree on a budget -- and pare a projected $1.6 trillion deficit -- are in their fifth month of stop-gap measures to keep the government operating. In the long term, they hope to reduce the federal debt and deficit without sending tax rates through the roof or eliminating cherished federal programs.
"We've had so many changes in tax law in the last 18 months that people are genuinely confused about what the rules are," said Joseph McLeod, tax partner in the Raleigh, N.C. office of Cherry, Bekaert & Holland, a certified public accounting firm. "Tax-return preparation has gotten more lengthy, more complicated. It takes more of our time, so we have to bill more at the very point in time when people want to pay less."
The majority of states declined to update their state tax codes to conform with the new federal rules, McLeod said. As a result, taxpayers must make two computations of income and depreciation, one for federal and one for state. "We're back to a two-tier system of taxation, or three tiers if you count the alternative minimum tax, and it's just going to get worse," McLeod said.
In addition to logistical hassles and uncertainty, some valuable tax benefits disappeared in 2010, and others fell in value. For the 2009 tax year, for example, people who received unemployment payments could exempt the first $2,400 from income taxes. For 2010, every dollar was taxable, said Dustin Stamper, a manager in the D.C. tax office of accounting firm Grant Thornton.
In 2009, people who didn't itemize deductions could still take a standard deduction for property taxes, up to $500 for individuals and $1,000 for couples filing jointly. That also went away in 2010. "That was a nice little break,” Stamper said, noting that the provision tended to benefit those with lower incomes whose homes were mortgage-free. "It was big for older folks and some retirees."
The tax credit for purchasing a hybrid car expired at the end of 2010, and the value of a tax credit for energy efficient home improvements fell between 2010 and 2011, said Scott Avirett, director of the Green Research Council, an advocacy and research group.
The delay in finalizing various forms, such as Schedule A for reporting itemized
deductions, most affects those with complicated returns. Early filers tend to be those with simple tax returns, who wouldn't have been affected, Smith said. Moreover, he said, most intermediaries, such as tax software preparers, who send returns to the IRS electronically were accepting them and just waiting until Feb. 14 to transmit them to the government -- making little difference to the taxpayer. At this point, the IRS has processed the same number of returns as this time last year, meaning the government has caught up despite the delay, he noted.
With 70 percent of returns filed electronically, any delay in preparation of paper forms isn't significant to the majority of taxpayers, Smith added. The IRS estimates that only 9 million out of the 140 million returns filed annually suffered because of the delay this year.
But McLeod said many of those who file early are expecting a refund, which they would like as soon as possible. Many of his clients don't own a computer, he said, and find it a burden to be pushed towards electronic filing by the government.
It's better for the IRS to delay accepting returns while updating software and testing systems, rather than rushing to open the filing season and then encountering glitches, said Stamper of Grant Thornton. "It's more important to get it right, even if that means folks have to wait a couple of weeks to file," he said.
While the focus at this time of year is on income tax returns due in April, the changes this year go beyond that. For instance, taxpayers face one set of rules for the estate tax in 2010, another in 2011 and an entirely different set in 2013. If you converted a traditional Individual Retirement Account to a Roth IRA in 2010, you'll be subject to different tax treatment than those who do so in 2011.
Taxpayers who bought a home in 2008 and took advantage of the first-time homebuyer credit must begin repaying the credit, valued up to $7,500, said Jackie Perlman, principal tax researcher for H&R Block. "That's a bit of a tough bill for some people to swallow," Perlman said, noting that those who bought a home in 2009 and took the credit never have to pay it back.
As a silver lining, she pointed to popular tax cuts that were extended in late December, most notably the alternative minimum tax “patch” and state sales tax deductions. Taxpayers with incomes below a certain threshold must remember to claim the Making Work Pay credit this year, even if their withholding increased because of the credit, she added.
Another bonus benefits procrastinators: federal taxes aren't due until Monday, April 18. That's because the traditional due date, April 15, falls when Emancipation Day will be observed in the District of Columbia, marking the day President Lincoln freed the slaves in D.C., April 16, 1862. Taxpayers “have a little extra time this year," Smith said.