Are you in a hurry to get a refund from the IRS on your 2010 income taxes? Well, you may just have to wait, says the IRS. The IRS issued a press release on December 23, 2010, saying that “taxpayers affected by recently reinstated deductions [and] taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid-to late February” to file their individual income tax returns.
How many taxpayers does this affect? About one-third of individual filers itemized deductions on their 2010 returns, according to the IRS. In 2008 (the last year for which figures are available), about 142.5 million individual income tax returns were filed. So this delay affects, potentially, a mere 47.5 million taxpayers, more or less. That’s 47,500,000, or more than 7 times the population of Arizona (assuming the accuracy of the 2010 census estimate that the population of Arizona is 6.4 million).
And why must you delay filing, if you itemize deductions? The IRS says that last-minute changes in the law mean that the IRS will need to “reprogram its processing systems” for extensions of the state and local tax deduction, the deduction for college expenses, and the educator expense deduction. Apparently, however, anyone who files Schedule A will have to wait, not just those claiming those particular deductions.
The IRS didn’t offer any explanation as to why they have to reprogram their systems when the last-minute tax legislation they are talking about simply extended provisions that were set to expire. Perhaps the IRS had taken the proactive step of reprogramming their systems based on what the law would have been had the provisions expired, and now has to switch their computers back to the way they were before. It doesn’t seem like that should take long enough to delay their ability to process tax returns by a month and a half, though.
I do sympathize with the IRS (well, maybe sympathize isn’t the right term, maybe I should say that I understand their predicament), in that they don’t make the laws. The IRS can only react to what Congress does. Congress is continuing to expand the federal tax code at an alarming rate, all the talk about “tax reform” notwithstanding. What’s perhaps even worse is Congress’ enactment of more and more tax code provisions that only apply for limited periods of time. Not only does that create problems like the IRS is contending with now, but it makes planning for the future very difficult for taxpayers and their advisers. Just to pick an example at random, how does a married couple in their 40s do estate tax planning now that Congress has made a change to a crucial estate tax provision affecting only married couples, but that change only applies for the next two years?
By the way, why isn’t one-third of all individual income tax return filers an even bigger number? Seven times the population of Arizona is a lot of people, but it’s nowhere near one-third of the country. Well, part of the reason that number isn’t bigger is because about 47% of all households don’t have to pay federal income tax, according to 2009 figures from the Tax Policy Center. I’m not sure how many of the people who don’t have to pay federal income tax who still must file a tax return, but my guess is that a large number of the people who don’t have to pay any income tax don’t file a return.
MORE FEDERAL TAX FUN – WHEN DOES THE REFORM START?
While we are on the subject of federal tax law changes, here, courtesy of Thomson Reuters, is a rundown of the most notable changes adopted via the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (note that none of the changes last longer than two years):
• The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
• Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
• A two-year alternative minimum tax (“AMT”) “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
• Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
• Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
• Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 deduction for certain expenses of elementary and secondary school teachers; and the research credit.