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IRS announces change to 2018 Schedule D Tax Worksheet

Technical topics regarding tax preparation.
#1
makbo  
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Hot off the electronic press from my software vendor (UltraTax), I have not seen a press release from IRS yet.

"IRS announces change to 2018 Schedule D Tax Worksheet
The IRS has reported to the professional tax software community that they have found that the Schedule D Tax Worksheet for Forms 1040 and 1041 were not properly taxing certain capital gains at the new lower 2018 tax rates, but instead the worksheet was taxing them at their maximum rate of 25% or 28%. The worksheets are used to figure regular tax in certain instances for Filers of Forms 1040, 1040-NR, 1041, and 990-T. The IRS has corrected these worksheets and released newer versions which have been included in UltraTax/1040 version 18.3.7 and UltraTax/1041 version 18.3.6 software updates. Refer to the User Bulletins for these updates for more information on what the IRS has changed and the tax returns affected."

[...]
"Per the IRS, only a fraction of returns meeting these specifications [not listed here] will have a different result in tax on the last line of the worksheet to carry to the tax return as the amount of regular tax."

So while the change might impact only a tiny number of taxpayers, unfortunately for those it does affect, there is a ripple effect throughout other forms on the return, such as 2210, PAL calculations, 1116, 2555.
 

#2
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I think we all appreciate this update, thanks.

makbo wrote:So while the change might impact only a tiny number of taxpayers, unfortunately for those it does affect, there is a ripple effect throughout other forms on the return, such as 2210, PAL calculations, 1116, 2555.

I'm not sure how the amount of tax on collectibles and unrecaptured 1250 gain would affect PAL calculations or the foreign earned income exclusion. It seems to me that both of these calculations happen before the regular tax calculation. Passive activity credits would be impacted, but not losses.
 

#3
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At least UT was kind enough to add Data Mining searches specific to this update. After running the reports we found that 3.2% of our 1040 clients were affected, but out of all of those "affected" only one has a significant change. Most of the others the tax only changed by $1.
 

#4
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Thank you for highlighting this. Apparently I skim release notes too quickly and nearly missed it. Of the 500+ returns we processed, 16 showed up in the UT data mining for this, and of those, 5 are now due refunds ranging from $200 - $1,000. If we have to look stupid to our clients for an error in tax calculation, at least we get to follow that up with their refund amount.
 

#5
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Chay wrote: Passive activity credits would be impacted, but not losses.

I should have mentioned that I was paraphrasing the UltraTax release notes, not doing my own independent analysis. Yes, they specifically emphasized Form 8582-CR as a possible form affected by the Schedule D worksheet update.

Ironically, I would normally depend 100% on my software to determine what other forms changed in a given return as a result of this update.

jesella wrote:Apparently I skim release notes too quickly and nearly missed it. [...] If we have to look stupid to our clients for an error in tax calculation, at least we get to follow that up with their refund amount.

It was in the Product News section of the home page when you open UT, at least that's where I saw it. I don't always download updates immediately (so I don't see the release notes), but I do read the new product news and alerts on the home page.

I don't think you have to look stupid. If what UT wrote was accurate, it was clearly the IRS' mistake, not yours. I don't think a client expects you to beta test every single calculation in your software.
 

#6
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Did this have to do with the often-misunderstood tax brackets and rates for certain long-term capital gains, which go up to a maximum of 25%, but don't *start* at 25%? This calculation is clearly misunderstood, as no one seems to be able to put it in simple words. But only the software writers really *have* to, and it appears they, too, can't get it right all the time, either.

Where was that post that sorta said that if the tax rules are too complicated to explain, they are too complicated?
 

#7
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"clearly misunderstood" is a catchy phrase.
 

#8
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Thank you, Len.

Here's the quote that said if something's too complicated, it's too complicated:
There is serious academic research suggesting that if tax law is too complicated to be explained to a layperson at the level of an IRS pub or form instruction, it is too complicated to be law.
-makbo, 26 Apr 2019.
 

#9
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Per UltraTax user bulletin, "The IRS changes are limited to renumbering line 18 on the Form 1040 Schedule D Tax worksheet as line 18a, adding new lines 18b and 18c, and updating the line references accordingly on line 19." My first take is that some taxable income amounts that used to be in the 28% and 33% tax rate brackets pre-TCJA are now in the 24% bracket, so yes, less than 25% maximum rate. And lots of taxpayers even with capital gains income don't use Schedule D tax worksheet, they use the Qualified Dividends and Capital Gains Tax Worksheet, which was not mentioned as having any changes.

"But only the software writers really *have* to, and it appears they, too, can't get it right all the time, either."

It's not the fault of the software programmers (not "writers"). Their job is to implement officially published IRS forms and worksheets as they exist. Now, perhaps they should have alerted the IRS to a possible bug in the worksheet, but it would still not be good for them to implement a change on their own that didn't match official IRS publications. And equally, those who still fill out their income tax returns by hand on paper should also have caught the problem. Maybe they did; we don't know what brought the error to the attention of the IRS -- internal or external reporting.

The phrase "maximum rate of 25%" is pretty clear, but people don't always pay close attention.

And let's not forget to allocate appropriate blame to Congress. In their effort to "simplify" taxes, they assigned explicit brackets to cap gains rates under TCJA, instead of the previous method of simply tying them to the regular tax brackets. So, this made the calculation more complicated.

As for the mention of tax law complexity, I actually posted the link to the research paper that addressed this somewhere around here in the last year or two, but no time to go look for it right now. My more recent comment was just paraphrasing what I had posted and linked to previously.
 

#10
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I discovered this Back in March, but as a lowly new CPA, no one seemed to listen to me, or really, they had no time. I sent in a form request submission to the IRS then and informed our tax software providers. I don't know what has gone on behind the scenes, whether there were a lot of people that realized this, or if it was just me. But I haven't found any professionals talking about it, and I just posted it to Facebook and a general intellectual discussion board because I had no clue about any professional discussion sites. I found this one by searching for the text of the software update to see if there was anything out there yet.

http://boards.straightdope.com/sdmb/sho ... p?t=871932
https://www.facebook.com/steven.l.glowacki - just publicly reposted my March post on the subject.

I would like *some* credit from *someone*. I'm not sure if I'm going to get it.
 

#11
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The IRS has reported to the professional tax software community...


The IRS has corrected these worksheets and released newer versions which have been included in this update.


The Schedule D instructions on the IRS website still show the revision date as Dec. 21, 2018 and the tax worksheet is still the old one. Has anyone found anything from the IRS regarding this?
 

#12
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Glowacks: Kudos, and welcome to the best tax forum I've been on today!
 

#13
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glowacks, excellent catch!
 

#14
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I just did the UT data mining, and found it to be overly broad. Now I can understand returning the results for people with only a few dollars of 1250 gain, but why is it returning those in the 12% ordinary bracket and those with net capital losses? I guess they searched by taxable income, compared that to the ordinary income tax levels this bug affected, and returned all of those with any 1250 gain. So if the (normal) capital gain put them above the 22% threshold for ordinary income if it had all been ordinary, it would be returned, as well as those with no capital gain tax because of a loss - so long as they were in the right ordinary tax bracket.

Still, I did find another that I hadn't worked on that will be getting a sizable sum back when we amend, and I doubt my boss would have found it, nor would I have without the UT data mining. It looks like on that one all the 1250 gains came in on K-1s after I had worked on it, so I hadn't flagged it for special handling.

Another hilarious part about this is that the worksheet actually worked perfectly on one occasion: when all the capital gain was 1250. The reason it worked there is that there's a sanity check at the end of the worksheet so that you don't end up paying a dollar more because of rounding issues when you have a very small amount of capital gain. That sanity check might have been the reason the IRS didn't catch it before, because they may have thought the sanity check would *always* fix that problem, forgetting that it wouldn't if there was actually a significant capital gain (which there very often is when there's 1250 gain, but in one case there was no other capital gain because the only gain was due to depreciation taken on a home converted from primary residence to rental and sold within the time frame to have the non-depreciated gain excluded still).
 

#15
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glowacks wrote:there's a sanity check at the end of the worksheet so that you don't end up paying a dollar more because of rounding issues when you have a very small amount of capital gain.

You not only found the error but you also understand the deeper meaning of each line? How do you know so much about this worksheet, especially considering you seem to be relatively new to the profession?
 

#16
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I guess they searched by taxable income, compared that to the ordinary income tax levels this bug affected, and returned all of those with any 1250 gain.


The UltraTax search criteria is limited to those with either net 1250 gain or 28% gain, and Schedule D Tax Worksheet (original version) Line 18 below 157,500 (315,000 for MFJ or QW).

I attempted to further restrict the data mining to only those with net capital gain but gave up in quick order. While the data mining tool is quite powerful it is also horrendously cumbersome to use. Much easier to just open each of the clients and compare the recalculated worksheet to the original version in the file.
 

#17
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As of today 5/14, the UltraTax product news display, when starting the software, states:

"Important! The updated worksheet will also be posted to IRS.gov on May 16th, 2019 but is already included in UltraTax/1040 version 18.3.7 and UltraTax/1041 version 18.3.6 software updates. The IRS will review returns filed prior to May 16th, 2019 to determine any needed corrections. These taxpayers do not need to file an amended return, call the IRS, or take any other action at this time."
 

#18
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And, Glowacks, you spelled "threshold" correctly, too. Well done! You'll find this forum to be a great place on which to do many things... Stick around!!
 

#19
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Chay wrote:
glowacks wrote:there's a sanity check at the end of the worksheet so that you don't end up paying a dollar more because of rounding issues when you have a very small amount of capital gain.

You not only found the error but you also understand the deeper meaning of each line? How do you know so much about this worksheet, especially considering you seem to be relatively new to the profession?

I finally got around just now to following the early March 2019 link that Glowacks posted.

I don't want to take away from Glowacks, as full credit for this helpful follow-through is due to them, it is of great value to many of us and our clients --

BUT, the concept that the 25% rate that pertains to Sec 1250 gain (ditto for collectibles 28% rate) is a MAXIMUM rate is just not that difficult or complicated to understand. In fact, I would expect someone newer to taxes to have a better grasp of this, I know I did in my first few years as a tax pro. It was one of my H&R office mates in my first few years who pointed out to me that the rate was a max only, and you would not be taxed on capital gains at > your regular tax rate. As one in the early years of the profession might agree, you are more open minded and skeptical when it comes to asking whether something is correct than someone who is comfortable with a wide variety of tax returns, and thus is lulled into a false sense of confidence.

The other piece of this is actually working through the Schedule D Capital Gains worksheet, which of course includes the AMT version as well. (I hope IRS remembers to fix that? Or does the AMT version need fixing?) I must confess, the one year I sold some real estate that was subject to multiple tax rates, I went through the worksheet line by line myself, but that was before I was a tax pro, and I haven't gone through it with such attention to detail since then.
 

#20
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makbo wrote: the concept that the 25% rate that pertains to Sec 1250 gain (ditto for collectibles 28% rate) is a MAXIMUM rate is just not that difficult or complicated to understand. In fact, I would expect someone newer to taxes to have a better grasp of this, I know I did in my first few years as a tax pro.

I don't think glowacks is looking for credit for having understood this. I agree it's pretty basic, and in fact I'm surprised to hear you suggest that any tax pros with more than a couple years of experience might not have an intuitive understanding of it.

makbo wrote:The other piece of this is actually working through the Schedule D Capital Gains worksheet, which of course includes the AMT version as well. (I hope IRS remembers to fix that? Or does the AMT version need fixing?) I must confess, the one year I sold some real estate that was subject to multiple tax rates, I went through the worksheet line by line myself, but that was before I was a tax pro, and I haven't gone through it with such attention to detail since then.

And I'm sure that if you actually sat down with the 2018 IRS worksheet and went through it line by line with a return affected by the mistake, you would have caught it too. I'm know I would have.

The difference is that neither of us actually did. And I seriously wouldn't expect anyone to. Like you said, this stuff is so basic it's beyond thinking about. But glowacks did. Somehow it came to his attention, and I doubt it was the pure dumb luck of just happening to study a particular worksheet just a few months after the IRS happened to make a mistake on that worksheet.
 

#21
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So you two are saying that everybody with a kernel of reading ability and at least a two-digit IQ should recognize immediately that "Your capital gains tax is based on your regular tax bracket, while your unrecaptured Section 1250 gain is [taxed at] a flat rate," - as one source has written on its website - is simply wrong, incorrect, misstated, and should be disregarded. Which part of it?
 

#22
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makbo wrote:[ . . . ] As one in the early years of the profession might agree, you are more open minded and skeptical when it comes to asking whether something is correct than someone who is comfortable with a wide variety of tax returns, and thus is lulled into a false sense of confidence.


My sense is sort of the opposite; the more training and experience one has with Federal tax matters, the more likely one is as a general rule to be skeptical and to question what one reads -- particularly with respect to the lower level materials, such as published IRS instructions.

I was thinking just the other day, though, about the fact that with computer programs being used as part of the preparation of virtually every tax return I prepare, I no longer do certain things -- like independently checking the math to make sure that the computer program's arithmetic is correct. Also, I don't check the net figure on, say, a Schedule C, to make sure that this is the figure actually reflected on the face of the Form 1040.

But, even in the old days (late 1970s, early 1980s for me), it was the same in a sense: We used electronic desk calculators -- but we didn't independently check to make sure that the desk calculator was actually doing the math correctly. Instead, we performed the calculation on the desk calculator two or three times, to see if we got the same answer consistently. I still do that any time I'm using my desk calculator (or the calculator in my smart phone).

The narratives found in IRS Instructions and IRS Publications (as opposed to the computational worksheets included in the Instructions and Publications) do contain some errors, but my sense is that the errors are few and far between.
 

#23
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glowacks is like Harry Markopolos. He told everyone Maddoff was running a scheme but nobody listened.

Good job glowacks.

I guess if you read general intellect discussion boards and actually know about something called a "sanity check" in the software we can not say it was a fluke.
 

#24
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LW25 wrote:[ . . . ] We used electronic desk calculators -- but we didn't independently check to make sure that the desk calculator was actually doing the math correctly [ . . . ]


To digress even further, checking a desk calculator to make sure that it is actually computing the correct arithmetic may not be as weird as it sounds, too.

In the first CPA where I worked, we audited banks. One of the banks had desk calculators that looked like regular ten-key calculators, but they had a sort of cartridge insert for the calculators that held the program to calculate the interest rate on a loan (given the present value, monthly payment, frequency of payment, frequency of compounding, number of months, and so on). The machines were used by bank personnel to come up with the exact interest rate to be disclosed as "APR" on the loan documents.

I don't remember all the details, but when we tested the machines, we found that the bank's calculations were resulting in disclosures that, on first blush, sometimes did not appear to comply with what was then Regulation Z (Truth in Lending), after considering what I think were the "rounding" rules. This could have been a major problem for the bank, because the bank might have been required to refund some amounts to hundreds or thousands of bank customers. I forget exactly how the problem was resolved, but maybe the solution involved an application of the old concept of m-a-t-e-r-i-a-l-i-t-y........

Suffice to say: It's possible that no officer or employee of the bank had previously questioned the accuracy or precision of the interest rate calculations on those desk machines.
 

#25
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Here you go, just posted at the IRS web site in the last hour (at least from where I am on the internet)

https://www.irs.gov/forms-pubs/error-in ... -form-1040
 

#26
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The 2018 Schedule D Tax Worksheet in the Instructions for Schedule D (Form 1040) contained an error. The tax calculation did not work correctly with the new TCJA regular tax rates and brackets for certain Schedule D filers who had 28% rate gain (taxed at a maximum rate of 28%) reported on line 18 of Schedule D or unrecaptured section 1250 gain (taxed at a maximum rate of 25%) reported on line 19 of Schedule D. The corrected worksheet is at the end of the updated instructions at the link above.


Here is the linked page...


Page Not Found.

Error 404.

Sorry, this page isn't available.

You'd think they could at least get THIS right!!
 

#27
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Chay wrote:
glowacks wrote:there's a sanity check at the end of the worksheet so that you don't end up paying a dollar more because of rounding issues when you have a very small amount of capital gain.

You not only found the error but you also understand the deeper meaning of each line? How do you know so much about this worksheet, especially considering you seem to be relatively new to the profession?


I had to spend a few hours on research between the code and the worksheet to find this out. Some of the lines on the worksheet explicitly calculate certain lines in the code. Some of them do not and are amalgamations of various numbers and only used in intermediate calculations. It was absolutely the hardest thing I have ever done as an accountant. I do not fault other people used to the IRS being right all the time for not taking the time to research this. When I started to do the research I was so sure that I was missing something, because the IRS is "always" right, but I simply went line by line in the code and did the calculation and it differed from what the worksheet said, and the worksheet ended up wrong. As someone at a small CPA firm with only a year of being a CPA, there wasn't much we could do except notify Thompson Reuters and put in a form comment submission through the IRS website, as I mentioned. I went back and forth with TR a bit before they understood that my problem was not with their software, but with the IRS worksheet. I didn't hear anything back from TR after the point I explicitly told them that, and I don't know what went on behind the scenes after that. But it took 2 months to straighten out, and not until after tax season.

However, the "sanity check" at the end I already knew about for a different reason: personal experience preparing the worksheet by hand on a relative's return. Before I got a job in accounting, I didn't have any access to software and so I used the IRS free file system where you have to go line by line and enter numbers and it doesn't do much of any math on your behalf, to the point where I forgot to include personal exemptions and thus got a check from the IRS months later because of my math error. Anyway, this relative had a small amount of qualified dividends, such that 15% of the amount was at least $1, but that subtracting the number from taxable income would not change the ordinary income tax because it was being calculated by tax table. So if you follow the worksheet (the simpler one for just regular capital gain and QD, but the same thing is done on the more complicated one), you calculate a tentative tax of $1 + your previously calculated ordinary income, meaning that the worksheet would find that by using capital gains rates your tax would go up, and since this can't happen, it takes the minimum of your tax if all your income is ordinary and the calculation at capital gains rates.

Was being a new CPA helpful in leading me to do this? Not really. This stuff is fairly obscure and not exactly something that gets covered with any particularly emphasis in school or in CPA review materials. I took and passed the CPA exam several years before I could manage to find a job because of my personality issues with Asperger syndrome, so it's not like I was immediately out of school and fresh from studying. What did help was my unrelenting questioning of authority on purely factual matters, and a nearly encyclopedic knowledge of the laws as they affect the types of clients I am called on to work with at this firm, and the ability to comb through the Internal Revenue Code and understand it, which are things my Asperger tendencies accentuate compared to the general accounting profession. If this involved something with respect to the new laws regarding foreign operations and base erosion (or whatever), things that I have only passingly read about, there's little hope I would have found it. But given that one of our major clients is a real estate investment group, I'm well aware of how 1250 gain works. I only looked into it more simply because I thought the tax on an individual who sold some rental real estate seemed too high, and I peeked at the worksheet in question and noticed the issue. If I hadn't had that feeling that the tax was too high, I wouldn't have thought to look. I admit that part of the reason I checked though was that I had already recognized the potential problem there was with moving ordinary tax rates between 15% and 25% when it came to 1250 gains, but my assumption was that the IRS would handle it correctly, or even more likely that Congress was the ones who screwed it up among the two. I was absolutely shocked to find out the IRS actually implemented something like this incorrectly, and that whoever wrote the new legislation correctly took into account the issues there were with the change in ordinary tax rates.
 

#28
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glowacks wrote:It was absolutely the hardest thing I have ever done as an accountant. I do not fault other people used to the IRS being right all the time for not taking the time to research this.

I have to say, section 1(h)(1) is the only section I've read in the Code so far that I'm unable to comprehend. I know what the outcome is supposed to be, but I lose track of what all of the subparagraphs are saying by the time I get to the end.

About the IRS - I'm not sure if you know this or not, but they are wrong or unclear about a lot of things all the time. This includes plain language that they insert into their instructions and publications. Just today I stumbled on this example from Publication 504:

Divorce or separation agreements after 2018. Amounts paid as alimony or separate maintenance payments under a divorce or separation agreement executed, or changed, after 2018 won't be deductible by the payer. Such amounts also won't be includible in the income of the recipient.

This statement is contradicted not only by section 11051(c) of the Tax Cuts and Jobs Act, but also by another IRS statement about the issue in "Topic Number 452 - Alimony". Both of these sources confirm that changing a divorce agreement only affects the deductibility of the payments if the modification expressly states that it does.

glowacks wrote:However, the "sanity check" at the end I already knew about for a different reason: personal experience preparing the worksheet by hand on a relative's return.

I think this experience will serve you well in the profession. Personally, I was never very involved in taxes before entering the profession and there's a blind spot when it comes to knowing about some things (the worksheet, for example) that your average intelligent taxpayer might understand.

glowacks wrote:I only looked into it more simply because I thought the tax on an individual who sold some rental real estate seemed too high

This is the real accomplishment. Any number of contributors on this forum could have slogged through the other work that you described, but how many of us could really say that we could have looked at the number on line 11a of Form 1040 and thought that it "seemed too high"?
 

#29
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Fascinating explanation. I suspect that, over the years, you'll find one or two other mistakes that most of us might miss because we have come to trust the software. Your approach is a welcome one.
 

#30
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So my boss and I went on the practitioner hotline to call about the letters two of the affected clients have received and serendipitously got a guy who was somewhat in charge of the issue there (I don't know the details) or at least had just been to meetings about this, and was quite happy to talk to some people who were actually on the other side of the issue, as most people were calling about why they shouldn't amend their returns if they shouldn't have paid as much tax. Apparently despite the worksheets being updated, it's not entirely updated at the IRS and that such an amendment filed now would be rejected with a math error. So perhaps part of the delay is trying to figure out exactly how they are going to be fixing this issue. As rare as the problem is overall, the number of people affected is likely in the thousands.

He also claimed that they knew about it at the IRS around the same time, but I don't know if I'm the one who tipped the IRS about it or if it was discovered independently. My boss says I'll never find out if I was the root cause of this change or if they found out about it from numerous independent sources. The fact that Thomson Reuters completely misunderstood my issue at first indicates they were not aware of it until I brought it to their attention, but I haven't heard anything from them that would confirm this. I would just like to know just how rare it was for someone to have discovered this mistake independently, as apparently there were no professionals that did made it known to the wider professional world prior to the Ultra Tax update. The fact that it was in an Ultra Tax update that we first heard about, which is what I work on, and not from some other software provider, suggests to me that the people at Thomson Reuters were heavily involved in the discussion of this issue with the IRS such that they had a solution ready to go before it was official, and as I mentioned, given my interactions with their support team, I almost certainly was the first to mention the issue to Thomson Reuters.

Maybe I should just stop caring about what sort of role i played in this, but it would nice for me if I knew I was a major factor in getting this fixed, just to know that at least once in my life I played an important role in something that affected thousands (probably) of people, just by doing my job as best as I could. If I was just another cog in the wheel of getting this moving, then it would be just the same as everything else I do - maybe better than average, but it didn't really matter that it was me and not someone else.
 

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Spell Czech wrote:So you two are saying that everybody with a kernel of reading ability and at least a two-digit IQ should recognize immediately that "Your capital gains tax is based on your regular tax bracket, while your unrecaptured Section 1250 gain is [taxed at] a flat rate," - as one source has written on its website - is simply wrong, incorrect, misstated, and should be disregarded. Which part of it?


I found that quote on a website when looking for whether anyone had actually figured it out before. My interpretation was that they had studied the worksheet the IRS gave and explained how the calculation worked based on their understanding of what the worksheet did, without having bothered to read the Code. However, it's quite clearly a flawed outlook anyway, because this issue *only* affects people in the 22% and 24% brackets. Those in the 10% and 12% brackets had it taxed as ordinary income the entire time, and those above the 24% bracket had it taxed at the "flat" 25% rate the entire time.
 


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