I’m fairly sure I’ve found a flaw in an IRS tax worksheet, one that propagates through to our tax software because it follows that worksheet directly. I let my employer know, but they’re busy. I sent an email to the IRS via the “comment on forms” submission box. I find it really hard to believe that no one has discovered this yet, nor has anyone online apparently even talked about it as I can’t find any discussion about this issue in the time frame in which it would be relevant. There’s discussion of a similar topic in 2017 that appears at the top of my searches for it, but that was before the new law that was passed that is what’s causing the problem. Somehow I’m the first one to notice and actually care about trying to fix it.
Details: If you have unrecaptured Section 1250 capital gain and are in the 22% or 24% ordinary bracket, the Schedule D tax worksheet still calculates your tax on the 1250 gain as though it should still be taxed at 25%. That’s the the maximum rate 1250 gain can be taxed at, but as capital gain it shouldn’t be taxed at a higher rate than ordinary income, and my reading of the law bears me out.
The issue is that before TCJA the first two tax brackets were 10% and 15% before going up to 25%. The first two ordinary income tax brackets were also the 0% capital gain brackets, and a place in the law where it says “the amount of taxable income taxed at 25% or less” was replaced by “the amount of taxable income that would be taxed at 0% as capital gains”, because that’s now what’s needed to be accurate for the 0% capital gain bracket; these two things used to be the same, but now aren’t. The Schedule D tax worksheet assumes that the top of the 0% capital gain bracket is also the amount that is still literally taxed at less than 25%, which it no longer is because of the reduction of the 25% and 28% brackets to 22% and 24%.
The law is actually correctly worded as I read through it and worked through the client I had in front of me to make sure; the IRS just did not sufficiently update their worksheets for the new tax law.