Commentary: Schedule D Or 6251: Choose Your Poison

What's the worst tax form you'll face this year? As the tax code gets more complicated, Howard Gleckman and Mike McNamee, who cover taxes from Washington, debate which of those annoying forms is the rottenest of all.

HOWARD: It's a no-brainer: Schedule D, the new capital-gains form is the worst. Sure, Congress cut taxes on capital gains. Mighty nice of 'em. But the price we're paying is a mind-numbing collection of rates, effective dates, and holding periods.

The form was bad enough when it ran 19 lines. The only tough part then was remembering how much that IBM stock cost when you bought it back in 1960. At least there was no confusion over your tax rate: You either paid a long-term rate of up to 28% for stuff you held more than a year, or regular income tax rates for hot growth stocks you flipped in 12 months or less.

The new Schedule D, however, is 54 lines long, and they barely got it to fit on two pages. No wonder. Thanks to 1997's "investor-friendly" tax law, the top long-term capital-gains rate drops to 20%. But there is a catch. Instead of having to hold an asset for a year to take advantage of the best rate, you now have to own it for 18 months. Unless, of course, you sold it between May 6, 1997, and July 29, 1997. In that case, you get the 20% rate even if you held for only a year. On the other hand, if you sold after July 28 and held the asset between 12 months and 18 months, you pay at a 28% rate. Unless the property is artwork or some other collectible, or unless it has been depreciated. In those cases, there are different rates. Still with me here?

As a result, the capital-gains tax you pay doesn't just depend on how long you held an asset. It's also based on exactly which dates you bought and sold. The need to figure all of that is what makes Schedule D such a nightmare.

At a time when everybody's favorite indoor sport is bashing the Internal Revenue Service, keep in mind that the agency didn't make this stuff up. Congress invented the cockamamy rate system. All the bureaucrats can do is create a form to reflect the new rules. Lawmakers do seem to regret what they've done. Already, House Ways & Means Committee Chairman Bill Archer (R-Tex.) is talking about returning to a two-rate structure--20% for assets held a year or more and ordinary income rates for everything else.

Low rates on capital gains are nice. But after investors see this form, they may dump all their stocks in favor of certificates of deposit. At least that will keep things simple until Congress gets us a capital-gains tax we can understand.

MIKE: Schedule D the worst? Sorry, Howard. That's a picnic compared with Form 6251. Never heard of it? Well, you will, as the dreaded words "alternative minimum tax" burn their way into your brain. You figure your taxes the usual way and think you're done. But an obscure instruction tells you to turn to Form 6251--and you find yourself in AMT's parallel universe. Here, you can't claim personal exemptions, deduct state taxes, or use many credits, including the new ones for kids and education. If your AMT exceeds your regular tax, you pay the greater amount.

Form 6251 is the tax-software publishers' secret weapon. Who, after all, can juggle two tax systems at once without a computer? But what's truly offensive about Form 6251 and the AMT is its reach. The AMT was designed in the 1970s as a last line of defense against high rollers' tax shelters. Congress has since stamped out the shelters, but the AMT remains. I first encountered Form 6251 in 1988 when I was figuring a $480 credit for my son's day-care bills. That's one of those credits capped by the AMT. Dutifully, I followed the instructions to compute my minimum tax and bogged down in a mire of aggravation. The exercise didn't net the IRS an extra penny.

More and more folks are going to discover the joys of 6251. Congress' Joint Committee on Taxation projects that the number of taxpayers owing AMT will rise fourteenfold, to 8.4 million, by 2007, because the AMT's exemptions and rate brackets don't rise with inflation. That doesn't include taxpayers whose credits will be capped--or uncounted millions who, like me, stumble through the 6251 maze only to find that the AMT makes no difference at all.

Schedule D is grueling, too. But the work offers a payoff: Fill out the form and you'll pay less tax. The only possible benefit from doing Form 6251 is avoiding a penalty. Except if you screw it up. Which is all too likely, and why 6251 and the AMT are the worst the U.S. tax system has to offer.

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