8960 or Fight! Can't file your taxes? Blame ObamaCare.

[Ubiquitous]

Some TurboTax customers are mad at Intuit, maker of the popular tax-
prep software, because they've finished their returns but are unable to
file. Their anger is misplaced. They should blame the Internal Revenue
Service, along with the 111th Congress and President Obama for enacting
and signing the tax increase with which TurboTax can't yet comply.
(They could also blame George W. Bush if they're in a jocose frame of
mind.)

At issue is ObamaCare's new 3.8% "net investment income tax." It took
effect Jan. 1, 2013, so that taxpayers are encountering it just now as
they prepare their returns for last year. In effect, it applies the
Medicare payroll tax to interest, dividends and capital gains.

But it doesn't apply to all such income. If your modified adjusted
gross income is under $200,000 (or $250,000 for a married couple), you
don't pay the tax at all. Further, if your modified AGI is above the
threshold but your noninvestment income is below it, the tax is applied
on the difference between your total income and the threshold.

If that's hard to follow, here's an example: Suppose you're an
unmarried taxpayer with a modified AGI of $210,000 and investment
income of $20,000. Your net investment income is $10,000, the portion
of your investment income above the total income threshold of $200,000.
Your net investment income _tax_ is 3.8% of this sum, or $380.

If you owe net investment income, you have to complete a single-page
Form 8960 to calculate your modified AGI and the tax. But the form's
brevity belies the new tax's complexity, as tax expert Tony Nitti wrote
in a Forbes.com piece last month:

When we saw that this new, complex area of the law would
ultimately be computed on a one-page form, we anticipated
that the meat of the computation would be done off-form in
worksheets provided by the instructions. And that's exactly
what happened. But that shifts the onus back to us as tax
advisors to make sure our inputs are correct, which means
we must understand the nuances of the final regulations.

Nitti wrote that Jan. 7, the day after the IRS released its
instructions for Form 8960. But those instructions are not final; they
include a cover sheet that warns: "DRAFT--NOT FOR FILING." Taxpayers,
tax advisers and tax-prep software developers are still awaiting the
final instructions.

Hence the TurboTax users' frustration. "Form 8960 was realeased [sic]
by the IRS on 1/24/14 but Turbo Tax keeps delaying it's [sic] release
every week, for another week!" a user complained last week on Intuit's
TurboTax AnswerXchange online forum. "I'm calling BS on this as they
have had access to the draft form for months! When is TT actually going
to make this form available and stop extending the dates? And why
should we keep waiting for this form when other providers already have
it available?"

Actually, Intuit has incorporated the form into its software. But for
the moment, it won't allow users to complete a return that includes an
8960. An AnswerXchange moderator answers the query by explaining that
in response to complaints from users--some of whom have switched to
other tax-prep software to get the job done--"we will enable the filing
of Form 8960 late on Feb. 26 (or possibly early the next morning) based
on draft instructions."

But the moderator warns: "If you make the decision to file now, you
_may_ need to amend your return if the final instructions produce a tax
liability different than the liability computed using draft
instructions. You assume responsibility for checking for product
updates to determine if the final instructions require an amended
return and for paying any additional tax and interest."

It's a no-win for Intuit and for impatient TurboTax users. By
preventing the filing of returns that include an 8960 until the IRS
releases the final instructions, the company was protecting its
customers from the risk of misfiling--and itself from the backlash that
would surely ensue if many filers end up having to amend their returns
as a result. The company still ended up with a backlash, its response
to which could yield another backlash if the final instructions turn
out to be different enough from the draft that a large number of users
have to amend their returns.

With the filing deadline not until April 15, why would a taxpayer be
eager to file in February? Presumably because he is due a refund and
wants his money back as soon as possible. By contrast, if you owe money
to the government, it is in your interest to wait until the deadline--
the latest date on which you can file without paying interest or
penalties on taxes underwithheld.

As we noted last year, taxpayers experience a refund as a windfall, but
that's an illusion. In reality overwithholding of taxes is an
additional tax in the form of an interest-free loan to the government.
By delaying its final instructions and thereby creating a bottleneck
that prevents some taxpayers from filing early, the IRS has effectively
imposed a new tax.

There's no reason to think that's the intent behind the delay, for
which bureaucratic inefficiency seems to us a sufficient explanation.
But given that the new tax was enacted years in advance--ObamaCare
became law March 23, 2010--the IRS's sluggishness seems especially
noteworthy, and unnecessary.

It also raises a worrying question about the changes in tax law that
took effect at the beginning of this year, the effects of which
taxpayers will see when they file their 2014 returns early next year.
The IRS is charged with administering the insurance "mandate" tax and
the income-based ObamaCare premium subsidies. The latter is a
considerably more complicated provision than the net investment income
tax. The former may be as well, especially given the exceptions and
waivers the administration has decreed to compensate for the botched
rollout of the ObamaCare exchanges (and the possibility of more to
come).

The reach of the mandate tax and the premium subsidies is considerably
broader than that of the investment tax, which affects only the
relatively small subset of taxpayers with income north of $200,000. To
be sure, the IRS is one of the more efficient federal agencies, since
collecting money is something government is undoubtedly good at. But
the agency's slowness in issuing final rules for the 2013 tax changes
does not augur well for next year.


--
Q: Why is ObamaCare like a turd?
A: You have to pass it to see what's in it.