Tax Cuts Set To Make Tax Filing More Complex Next Year

by Mike Godfrey, Tax-News.com, Washington

21 July 2003

The tax filing process is set to become an even more complex task next year as US taxpayers wrestle with a host of new rules, regulations and rates introduced in the tax package passed last month.

A look at an early draft of next year's tax return form recently published by the IRS confirms that the process will be even more time-consuming next time around. Taxpayers will need to calculate and retrospectively apply new share dividend rates, and capital gains rates, not to mention the hideously complex alternative minimum tax which will catch more people in its net next year. This is likely to lead to an increase in the use of tax preparers and tax software such as Turbo Tax, as people turn to the experts for help.

One of the central features of the tax cutting package was the reduction of the top rate of dividend tax to 15%, which was previously treated as regular income and taxed at up to 38.6%. This cut applies retroactively to the beginning of 2003. However, there are certain exceptions to this, such as dividends from REITs (Real Estate Investment Trusts), which will not benefit from the lower rates. Also, there is a degree of uncertainty over mutual fund dividends, although dividends paid from stock funds should generally qualify for the 15% rate. Importantly, stocks must also be held for longer than 60 days, but the rules surrounding this are complicated.

The new law will see the rate of tax on long term capital (i.e. stocks held for more than 12 months) reduced from 20% to 15%, although tax payers must pay particular attention to the 12 month rule. Otherwise, short term gains may be taxed as high as 35%.

Also, more people will have to consider the dreaded Alternative Minimum Tax next year. The Joint Committee on Taxation estimates about 2.4 million taxpayers will be snared by AMT this year. This is set to rise dramatically in the coming years according to forecasts, with 2.9 million being caught in 2004, and 11.3 million in 2005. However, most experts recommend that taxpayers do not attempt to fathom the vagaries of AMT alone, and advise them to seek professional help.

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