The IRS posted updated instructions for 2018 Schedule D (Form 1040), Capital Gains and Losses, that include a corrected worksheet. The revised worksheet corrects a rate error that may have calculated an incorrect tax liability for some investors.
Anyone who downloaded the Schedule D instructions before May 16, 2019, should download the new instructions. The IRS has already provided the new worksheet to tax software providers, so returns filed after May 15 should properly reflect the corrected worksheet.
The IRS is reviewing returns filed before May 16 that may have been affected by the error.
The updated instructions are available at https://www.irs.gov/forms-pubs/error-in-tax-calculation-in-schedule-d-tax-worksheet-form-1040.
Original 2018 Schedule D Worksheet
The original Schedule D worksheet included a calculation that did not work correctly with the new Tax Cuts and Jobs Act regular tax rates and brackets. The error affected only taxpayers who reported:
•28%-rate gain on line 18; and/or
•25%-rate gain on unrecaptured 1250 gain on line 19.
The corrected worksheet results in a lower regular tax liability for most affected taxpayers. However, it increases regular tax for a small number of taxpayers.
The worksheet calculation error may have affected a taxpayer if all of the following conditions exist:
•Form 1040, Schedule D, lines 15 and 16 are both more than zero;
•Schedule D, line 18 or line 19 is more than zero (or both are more than zero);
•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);
•Line 15 of the Schedule D Tax Worksheet is not more than line 14 of the Schedule D Tax Worksheet (the corrected worksheet does not affect these lines); and
•Line 18 of the original Schedule D Tax Worksheet (line 18a of the corrected worksheet) is not more than $157,500 ($315,000 if married filing jointly or a qualifying widow(er)).
However, the IRS believes the error actually affected very few taxpayers. Most taxpayers who file Schedule D:
•do not have amounts on Lines 18 and 19;
•check “Yes” on Line 20 (because Lines 18 and 19 are zero); and
•do not use the Schedule D Tax Worksheet to figure their regular tax.
These taxpayers are not affected by the error.
In addition, the taxpayers who do have amounts on Lines 18 or 19 typically file more complex returns, so they often obtain tax-filing extensions. Thus, many of these taxpayers are still waiting to file their 2018 returns.
What Should Taxpayers Do?
Taxpayers who think they may have been affected by the error can use the corrected worksheet to recalculate their regular tax liability. However, they do not need to do so. The IRS is reviewing all potentially impacted returns that were submitted before May 16. It intends to provide more information about this review later.
Taxpayers who think they may have been affected by the error do not need to file amended 2018 returns or contact the IRS at this time.