Tax reform cut long term gains and confusion
A year ago, Congress passed legislation that made massive changes to the tax laws. One of the most hotly debated areas of the tax legislation was the law regarding the taxation of capital gains. There are many people who believe this form of income should not be taxed at all, while others feel capital gains should be taxed as the same rate income that you earn at your job.
Just as the highest and lowest judges scores for Olympics ice skating are thrown out before other scores are considered and averaged, the firm opinions at the farthest extremes of the capital gains taxation controversy were immediately discarded, and the legislators were left with a muddle of wishy-washy opinions to sort through.
The law as it was written a year ago reflected this ambivalent attitude toward reaching a collective decision about capital gains taxation. After decades of legislative discussion about the unfairness of the capital gain tax laws, taxpayers were presented with a complicated, confusing, less-than-acceptable solution that was immediately recognized as a law that would need to be rewritten.
This summer, Congress re-addressed several confusing areas of last year's tax laws and presented us with the "Internal Revenue Service Restructuring and Reform Act of 1998." Much of the act dealt with changes to the structure of the IRS, particularly in the area of strengthening taxpayer rights. Mixed in with the IRS reform provisions, is a major change to the rules for computing tax on capital gains.
New tax rates effective 1/1/98
Now we have new capital gain tax legislation that attempts to correct the confusion of the prior law. The change to the capital gain taxes is retroactive to January 1, 1998, so all 1998 sales subject to capital gain tax are affected by the law.
The new rule does away with the 18-month holding period for long-term capital gain tax treatment, which was created with the 1997 tax law. All investment property held for more than 12 months and sold for a profit during 1998 is subject to a maximum tax of 20%. For taxpayers whose marginal income tax rate on non-capital gain income is only 15%, the tax on profitable sales of capital gain property held for more than 12 months is only 10%.
There is no relief, unfortunately, for those taxpayers who had to suffer through the computations of capital gains for their 1997 tax returns, nor is there any financial relief for those who gave up on the computations and hired an accountant to figure out their tax.
IRS (almost) accepts credit card payments
In other interesting changes to tax rules, the IRS has made the exciting announcement that it is attempting to make arrangements for taxpayers to pay their tax returns by credit card.
Most people know that businesses which accept credit cards pay a fee to the company or organization that processes the credit. For example, if you purchase dinner at a restaurant for $100 and charge the amount to your VISA card, the restaurant deposits the charged amount to its bank account but is then charged a percentage fee by the bank. If the restaurant pays a fee of 2.5% on its credit card transactions, then $2.50 of that $100 will be charged as a fee and the restaurant will only make $97.50 on the sale.
Consider the following scenario: If the IRS receives tax payments of $2 billion, and all those payments are charged on credit cards, and if the IRS, like the restaurant, is expected to pay a 2.5% fee on credit card charges, there will be a fee of $50 million on the taxes that were charged. I' ll bet you can guess what the IRS has to say about paying a fee of $50 million just so you can have the option of paying your taxes by credit card.
But, nice guys that they are, the IRS has decided to go ahead and allow taxpayers to charge their taxes, if the taxpayers will also pay the little fee associated with the charge. The IRS is referring to this fee as a "convenience" fee, no doubt because it's more convenient for you to pay the fee than it is for the IRS to pay the fee. This way, the IRS gets its entire $2 billion, or whatever taxpayers decide to charge on credit cards, and the taxpayers get the convenience of paying a small (non-deductible) fee along with their taxes.