In late 2002 I wrote to George W and then Senate Majority Leader Trent Lott (before he was struck down by foot-in-mouth disease) with a proposal for providing tax relief to investors. My proposal concerned excess capital losses.
Under current law, if you have a net capital loss you can deduct a maximum of $3,000.00 against other income (i.e. wages, interest and dividends, pensions, etc.) on your Form 1040. Net losses in excess of the $3,000.00 maximum are "carried forward" to future tax years.
If you had $20,000.00 in net losses on your 2001 Schedule D, you can deduct $3,000.00 on Page 1 of your 1040. The $17,000.00 balance is carried forward to 2002. This $17,000.00 is first used to offset any net capital gains, the $3,000.00 annual maximum is deducted against ordinary income, and any balance is carried forward to 2003. If you had $5,000.00 in net gians in 2002, you would hve a capital loss carryforward to 2003 of $9,000.00 ($17,000.00 less the $5,000.00 gains less the $3,000.00 deduction).
In reality, rather than having net gains in 2002, it is more likely that investors had additional net losses, increasing the loss carryforward to 2003.
I proposed that investors be given the option to "carryback" unused capital losses to be deductible against previous years' net capital gains.
I felt that this option was especially appropriate in the context of the current economic reality. During the late 1990s and into 2000, when the stock market was flourishing, many taxpayers realized, and were taxed on, large capital gains, including excessive capital gain distributions from mutual funds. In most cases these capital gains were reinvested in the market and in additional mutual fund shares.
In 2001 and 2002 the bear market provided these same investors with substantial capital losses. It seems only fair that they be allowed to carry back the losses to apply against the earlier gains of the bull market and get a refund of the taxes paid on these gains.
Allowing a carryback of capital losses would provide the economy with an immediate cash stimulus, as amended returns, filed to carry back the losses to apply against past gains, would produce current refunds. Taxpayers would not have to wait years to receive minimal annual tax benefits from their stock market losses.
An individual with $30,000.00 in net stock market gains in 2000 would have paid $6,000.00 in federal capital gains taxes, assuming the gains were all taxed at the maximum 20% rate. As capital gains increase Adjusted Gross Income (AGI), which in turn affects the deductibility of many items and most tax credits, and could cause the taxpayer to be a victim of the dreaded Alternative Minimum Tax (AMT), the actual total federal tax cost of the gains could have been much higher.
If that same individual had a $28,000.00 net capital loss in 2002, carrying back the loss, after the $3,000.00 current deduction, to apply against the tax year 2000 gains would result in a refund of at least $5,000.00.
There is precedent in the tax law for allowing the carryback of losses. For as long as I have been preparing 1040s, taxpayers have had the option of carrying back a "net operating loss" (NOL).
When I checked the contents of my "private mail box" at Global Mail last Saturday I discovered an envelope whose return address was "THE WHITE HOUSE, WASHINGTON, DC 20502". The letter inside, dated July 22, 2003 (about eight months after I had mailed my proposal to Washington), read:
"Dear Mr, Flach:
On behalf of President Bush, thank you for your letter. The President appreciates hearing your view and concerns.
President Bust remains confident in the faith and resolve of our Nation, and he is confronting our country's challenges with focus, clarity, and courage. As the President has said, this is a time of great consequence, and he is working for a prosperity that is broadly shared, strengthening domestic programs vital to our country, and answering every danger that threatens the American people.
To accomplish these goals, President Bush welcomes suggestions from all Americans. Thank you again for sharing your ideas.
Special Assistant to the President
and Director of Presidential Correspondence"
I never did hear from Trent Lott.
WHY APRIL 15th?
When the 16th Amendment was ratified, authorizing the federal income tax, the original statutory deadline for filing a tax return was March 1st.
The Revenue Act of 1918 pushed the filing deadline to March 15th. No reason was given for the change at the time.
When Congress completely revised the Tax Code in 1954, the filing deadline was changed to the current April 15. The IRS said the change was made to "spread out the peak workload". However, others have speculated that, as "Uncle Sam" had become aware of more refunds going to the middle class, extending the deadling gave the government more time to hold on to the money.