New IRS Forms Expected to Complicate Filing for Some
The Internal Revenue Service on Thursday issued draft copies of new tax forms that could complicate income tax filing next year for some taxpayers with individual retirement accounts and mortgage interest.
The forms, because of their complexity and length, could cause the same confusion and frustration that some taxpayers suffered completing the new W-4 forms this year, some accountants said Thursday.
“If people grimaced when the W-4s came out, they’re going to have the same reactions with this form,” William B. Kelliher, partner in the Washington office of the accounting firm Peat Marwick Main, said of the mortgage interest form. Previously, taxpayers have not been required to file separate forms for IRA and mortgage interest deductions.
Other Drafts Drew Comment
Taxpayers with only first mortgages on their principal residences will not have to use the new mortage-interest form, and the new IRA form must be used only by taxpayers wishing to make non-deductible contributions to IRAs.
The new forms were among the latest drafts of forms released this year to incorporate changes under the Tax Reform Act of 1986. The agency already has released draft copies of the new 1040, 1040A, 1040EZ and other forms.
Some previously issued new forms, such as one for children’s income, have drawn comments from accountants and others about their complexity and length.
IRS spokesman Robert Giannangeli said the forms are subject to public comment and revision. Other forms, including the basic 1040, already have been revised based on earlier comments.
The new two-page form for mortgage interest, numbered 8598, will be necessary for taxpayers with certain mortgage-type loans (including second mortgages, refinancings and home-equity loans) taken out after Aug. 16, 1986. The form will determine how much of the interest on those loans is deductible.
How Mortgage Interest Rules Work
Under tax reform, mortgage interest will be only partly deductible if the value of the mortgages exceeds the cost of the home plus improvements, unless the excess was used for educational or medical purposes.
Accountants and IRS officials said the form is complicated in part because it requires taxpayers to figure out the “average balance” of their mortgages for the year, rather than the beginning or ending balance. The four-page instruction sheet for Form 8598, also released Thursday, gives a choice of five methods to calculate the average balance.
To do the calculation, taxpayers may need to refer to payment statements issued by lenders. Taxpayers also may need records to verify the value of home improvements, a potentially difficult task if such work was done years ago.
“The bookkeeping is going to have to be better,” said Jeffrey S. Hillier, a tax manager in the Washington office of the accounting firm of Coopers & Lybrand.
The new form, Peat Marwick’s Kelliher said, may drive more people to use professional tax preparers, although the cost of the service may rise because completing the forms will take more time.
The new two-page form for IRAs, numbered 8606, will be used for taxpayers wishing to make non-deductible IRA contributions. Under tax reform, workers covered by a company pension plan earning more than $25,000 for individuals or more than $40,000 for joint returns will lose some or all of their IRA deductions but still may make non-deductible contributions.
