IRS Announces Error in Instructions in Capital Gains Tax Calculation for Forms 1040 and 1041

Blog
June 10, 2019

The Internal Revenue Service (IRS) recently announced that the instructions for calculating tax on capital gains for 2018 Forms 1040 and 1041 contained an error. The IRS explained that the tax calculation in the prior instructions did not work correctly with the Tax Cuts and Jobs Act’s (TCJA) regular tax rates and brackets. According to the IRS, all instructions for Schedule D that were downloaded before May 15, 2019 contained the error. It also noted that all tax returns filed after May 15 should use the new, corrected calculation.

For Form 1041, the error affected certain returns reporting a 28% rate gain (line 18c, column 2) or an unrecaptured section 1250 gain (line 18b, column 2). The error also impacted those reporting positive amounts in column 2 of lines 18a and 19 on Schedule D. For Form 1040, the error affected certain Schedule D filers who reported a 28% rate gain on line 18 of Schedule D or an unrecaptured section 1250 gain reported on line 19 of Schedule D.

Most taxpayers filing Schedule D do not report amounts on lines 18b or 18c (Form 1041,) or on lines 18 and 19 (Form 1040), and thus, would be unaffected by the erroneous calculation. Taxpayers affected by the calculation correction will generally realize a lower regular tax, though a minority will experience a higher regular tax, depending on each taxpayer’s individual situation.

The IRS has already provided the corrected worksheet to its tax software partners, so any return filed after May 15th will not be affected by the error. Therefore, most extended returns will not be affected.

The IRS has been updating affected returns since April 26th to reflect the correct tax using the new calculation. The Service explained that affected taxpayers do not need to file an amended tax return or call the IRS, as the IRS is reviewing all returns filed prior to May 16th to determine if corrections are needed. To those potentially affected by this error, the IRS simply stated that “more information will be provided later.”

In summary, taxpayers who filed the following for 2018 are potentially impacted:

  1. Form 1041, Schedule D, lines 18a and 19 in column (2) are both more than zero; and
  2. Form 1041, Schedule D, line 18b or line 18c is more than zero in column (2) (or both are more than zero)

Or

  1. Form 1040, Schedule D, lines 15 and 16 are both more than zero;
  2. Schedule D, line 18 or line 19 is more than zero (or both are more than zero);
  3. The taxpayer’s taxable income is more than $38,600 if single or married filing separately, $51,700 if head of household, or $77,200 if married filing jointly or a qualifying widow(er);
  4. Line 15 of the Schedule D Tax Worksheet is not more than line 14 of the Schedule D Tax Worksheet (those lines were not impacted); and
  5. Line 18 of the original Schedule D Tax Worksheet (line 18a of the corrected Schedule D Tax Worksheet) is not more than $157,500 ($315,000 if married filing jointly or a qualifying widow(er)].

If you have questions about whether your 2018 individual or fiduciary (estate or trust) tax returns might be affected by this error, please contact John Ure or one of our experienced individual or trust and estate tax advisors at 301.231.6200.