THE TAX ATTIC with Jerry Coon

Congress passes late tax law

Welcome to the 2011 tax season. It’s going to be a season with some challenges.

Jerry Coon

First, our Congress passed a very late tax law. They waited until December 16 to pass the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Predominantly, the law extends the Bush Tax Cuts and various other provisions to the 2011 and 2012 tax years.

Everyone likes stability; especially tax professionals who are diligently doing tax planning with their clients. They have to be pleased to know, with a great amount of certainty, that at least the laws in effect right now will still be in effect for the next two years. Granted, Congress may pass new laws along the way, but the ones passed on December 16 will most likely stand as they are printed.

Congress has provided stability by keeping the 2010 tax rates the same for the next two years. Those rates will be 10%, 15%, 25%, 28%, 33% and 35%. In addition, the capital gains rates and rules will be the same for the next two years. Long-term capital gains will be taxed at a maximum of 15%. For taxpayers in the 10% and 15% tax brackets, a special tax rate of 0% will continue to apply for the next two years. The Alternative Minimum Tax has been fixed through December 31, 2012. The favorable education tax credits and deductions that were modified by the American Opportunity Tax Credit are now available through 2012. The increased Child Tax Credit and Additional Child Tax Credits were extended.

In total, there are over two pages of provisions that were extended through 2012. It’s not the 2011 and 2012 provisions that will cause problems for this tax season. The problem arises because Congress did a very unusual thing. They retroactively brought back several provisions that had expired on December 31, 2009.

Before the advent of electronic filing, Congress could make changes with very little repercussion right up until December 31. Since returns were completed by hand, the Internal Revenue Service just adjusted the form and issued new written instructions telling taxpayers, tax professionals, and their own employees how to implement the changes.

It’s quite a bit more difficult to deal with late changes today. A very small percentage of returns are processed by hand today. Most are processed and submitted electronically and therein is the problem. The IRS still has to rework the form, revise the filing instructions, and tell everyone how to implement the changes.

Now, however, all of the IRS’ electronic filing and processing software has to be rewritten and tested. Each of the many private tax preparation software companies have software that has to be rewritten twice and tested for verification purposes. First, it has to be rewritten to accurately process the returns. Second, it has to be rewritten to coordinate with the IRS’ new version of software. All of this rewriting and testing takes time.

I think the men and women in Congress have no idea what they have wrought when they make changes on December 16.

The IRS announced on December 26 via New Release 2010-26 that these changes will cause a delay in processing up to 16 million e-filed tax returns. They are projecting that they will not be able to process any of the 16 million affected returns until mid- to late-February. Of course, not all of these taxpayers will be in a position to file their returns before mid-February. Plus, some of them will have balances due and won’t be anticipating a refund. However, according to one study, the total refund payouts that will be delayed are equal to approximately 10 to 15 billion dollars. Ouch.

Just what are these various changes that were reinstituted on December 16?

1. The $250 adjustment to income educator deduction for classroom supplies.

2. The itemized deduction for sales tax.

3. The $4,000 adjustment to income tuition deduction.

4. The itemized deduction for mortgage insurance premiums.

5. Increased contribution limits and carry-forward period for contributions of conservation property.

6. Tax-free distributions to charitable organizations from IRA by individuals age 70-1/2 or older.

Thanks, Congress, for giving taxpayers these deductions. But I have a feeling those 16 million affected taxpayers might not feel quite so thankful. 

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service in Rockford.
Contact Jerry at

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