Sunday, October 19, 2003

Income taxes get more taxing

By Andrea Coombes
CBS MarketWatch

Some American centenarians may remember that death and taxes weren't always certain.

Ninety years ago this month, President Woodrow Wilson signed into law the federal income tax code. It wasn't the first - for instance, an income tax was levied to fund the Civil War - but it was the one that stuck.

And ever since, the tax code has gotten more complicated. The printing of the 1913 code and related documents took 400 pages. Now, it takes 55,000 pages, according to CCH Incorporated, a Riverwoods, Ill., company that has been a publisher of the tax code since 1913.

Things won't get any easier come April. Tax accountants say recent changes will likely stump many Americans next year. "They made the law more complex, there's no question about it. A lot of mistakes will be made on tax returns," said Doug Stives, a certified public accountant and partner with The Curchin Group in Red Bank, N.J.

Breaks may lurk

Still, while he doesn't think the tax code will ever get simpler, Stives said all those changes add up to tax breaks. "They're throwing things at us that mean people are going to pay less tax. That makes taxpayers happy."

For instance, taxpayers may get 1099 forms from their mutual funds that include a slew of dividend categories. "It's not new, it's just the number of types of dividends are mind boggling," Stives said.

Those include qualified dividends which are taxed at either 5 or 15 percent - new, lower rates that will ease many Americans' tax burden - as well as nonqualified dividends taxed at regular income tax rates as high as 35 percent and capital-gain dividends, which can offset capital losses but are then taxed at a rate not exceeding 15 percent, Stives said.

Two other possible 1099 categories include nontaxable dividends, if the mutual fund invests in tax-free securities, and return of capital.

Even simple forms hard

"Something as simple as a 1099 is going to blow people away this year," Stives said.

Another source of potential confusion: Schedule D, the form used for reporting capital gains. This year's schedule will likely have 53 numbered lines, up from 40 last year, experts said.

A midyear tax-law change will necessitate two separate calculations on the form, and some dividends must now be reported on the form. People receiving dividends may now have to file Schedule D and the long tax form, when before they could use the short form.

In 1913, very few people needed a professional. The tax rates ranged from 1 to 6 percent, and only those who earned more than $3,000 (single) and $4,000 (married) had to file.

With an average income of about $750, not many people filled out a tax form, but when they did, they used the Form 1040. Then, it was three pages plus a page for instructions, according to CCH.

Instructions 126 pages

Now, the form has dropped to two pages, not including attached schedules, but the instructions go on for 126 pages (32 pages for the 1040EZ).

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