This year’s 1040 will look much different

I have read and heard much concerning the ins and outs of the Tax Cut and Jobs Act passed in December 2017.

This is one of the largest changes to the Internal Revenue Code to occur for a number of years and will affect nearly every taxpayer when they file their 2018 federal income tax return.

One thing I have not heard much about is the new tax forms.

The IRS has not released the final version of form 1040, but I have seen some draft copies. The following discussion is based entirely on the draft copies of the form that I have seen, and it is possible that the approved form may be quite different.

The first thing to know is that forms 1040A, commonly called the short form, and form 1040EZ have been eliminated. There will be only one form 1040 for 2018.

It is true that this year’s form 1040 could fit on a post card. It would be a large post card but the new 1040 is about one half the size of last year’s 1040.

The front of this year’s 1040 only contains your and your dependent’s names and social security numbers. You and your spouse’s signatures as well as that of a paid preparer. Essentially this is the top of page 1 and the bottom of page 2 from 2017’s form 1040. The second page of 2018’s 1040 (the back of the post card) is where income, deductions and taxes will be shown. 2018 form 1040 contains 23 lines compared to 2017’s form which contained 79 lines, sounds like things have gotten much simpler.

Well, things have not gotten simpler.

In addition to the existing 1040 schedules; A (deductions), B (Interest and Dividends), C (Profit / Loss from Business), D (Capital Gains and Losses) and E (Supplemental Income and Loss), the IRS has added schedules 1 through 6. The 56 lines eliminated from form 1040 have been moved to one of the six new schedules.

Schedule 1 is for income that is not from wages, interest, dividends, pension or social security benefits.

Schedule 1 is where business income, capital gains, state refunds, alimony and unemployment income will be reported. Capital gains will be reported on schedule D, then added to schedule 1 and ultimately transferred to form 1040. Schedule 1 will also be used for adjustments to income such as educator expenses, health savings account contributions, IRA contributions, and student loan interest.

Schedule 2 will be used to calculate your tax.

The draft I saw of this form was incomplete. I assume this is the schedule where you will subtract your deduction from your adjusted gross income and then calculate your tax. The draft I saw did include lines to report alternative minimum tax and excess advance premium tax credit repayment.

Schedule 3 will be used for non-refundable credits.

Foreign tax, child and dependent care expense credit are examples of non-refundable credits. Non-refundable credits will only reduce your tax burden. The best you can do with a non-refundable credit is a zero balance due, these credits will not generate a refund.

Schedule 4 will be used for additional taxes.

These should include selfemployment tax, health care responsibility tax and net investment tax. I assume the forms used to calculate these additional taxes will be still required. Once calculated the amount will be added to schedule 2 where it will be added to any additional taxes before being transferred to form 1040.

Schedule 5 will be used to report refundable credits and other payments.

Examples of refundable credits are additional child tax credit, American opportunity credit and earned income credit. Other payments would include estimated payments and payments made with a request to extend filing until October.

Schedule 6 will be used to communicate a foreign address and to designate a third party to discuss your return with the IRS.

While the forms have not been finalized, it appears that form 1040 will be a form used more for reporting information to the IRS than a form used to calculate income, deductions and finally taxes.

Let’s hope that the IRS finalizes these forms soon so that the tax software can be prepared and the tax preparers can become familiar with the software prior to tax season commencing.