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The New Form 1040 – Shorter Doesn’t Equal Easier

The New Form 1040 – Shorter Doesn’t Equal Easier

The IRS Reduced the Form 1040 to near Postcard-Size (we wish!).  Politicians debate over tax reform and most of us would appreciate a simplification of the tax code.  However, the Tax Cut and Jobs Act, which went into effect in 2018 is not a simplification by any stretch of the imagination.  Let me walk you through what you will see on your 2018 Form 1040.

The new Form 1040 looks significantly different than in past years.  The first thing you will notice is that the form is one page. In order to get the tax return down to one page, the information we are used to seeing on page 1 and 2  of the Form 1040 is now split out into different schedules.

  • Schedule 1 for additional income and adjustments to income (this includes many categories such as business income, alimony, capital gains or losses, rental income, unemployment compensation, educator expenses, HSA deduction, self employment tax, IRA and other retirement plan contributions – to name a few)
  • Schedule 2 for additional taxes such as AMT tax and repayment of the premium tax credit
  • Schedule 3 for nonrefundable credits such as the foreign tax credit and education credit
  • Schedule 4 for other taxes such as self employment tax, net investment income tax and additional Medicare tax (why are these not included on Schedule 2?)
  • Schedule 5 Other payments such as estimated tax payments, net premium tax credit and excess social security tax withheld

I find these new schedules and the way they are reported on page 1 of your Form 1040 to be very difficult to follow.  Key parts of your tax return are now hidden in the schedules and could be easily missed. It is important to understand these schedules so that all important elements of the tax return are included.  

Key Changes for 2018

The new Schedule A, itemized deductions has some big changes.

  1. State and local income taxes are limited to $10,000 (including state income or sales tax real estate tax, and personal property tax)
  2. Miscellaneous deductions such as job expenses, tax prep fees and investment expenses are not on the form at all.  That is because these are no longer deductible.
  3. Casualty losses are only deductible if they occur from a federally declared disaster
  4. The deduction of itemized deductions is no longer limited based on your income.  In 2017, if your income exceeded $156,900 your deduction could be limited and you had to complete a worksheet to calculate this.  

The Child Tax Credit for other dependents shows on Line 12.  The new $2, 000 child tax credit is for your dependents who are younger than 17.  You can get this credit now if your adjusted gross income is less than $400,000 for joint filers and $200,000 for single filers.  The income thresholds in 2017 were $110,000 (joint) and $75,000 (single) for a smaller credit, so many taxpayers will get the credit now. This is great news for families.  You also can get a $500 credit for other dependents who don’t qualify for the $2,000 child credit.

The bad news is that the Exemption deduction for yourself and your dependents is gone for 2018.  In 2017, on Form 1040 line 42 you deducted $4,050 times the number of dependents on your return. This is gone for 2018.  This change also makes calculating your W-4 to determine your federal and state withholding on your paycheck a little irrelevant. You must do a little more homework to determine your correct withholding now.

The Qualified Business Income Deduction, shows up on Line 9 of the new Form 1040.  This is a new deduction also called Section 199A deduction. The deduction is 20% of your qualified business income(QBI).  The issue is that the definition of what qualifies as income is complicated. For example, does your rental income qualify as QBI income?

Also, if you work in a specified service trade or business (SSTB)  your QBI deduction could be limited. The definition of a SSTB is included in the final regulations issued January 18, 2019.  The final regulations issued by the IRS are 248 pages. This new guidance applies to 2018 even though we just received it in early 2019, so we adapt as we go!  The new QBI deduction is great for business owners and we want to use it to the fullest. However, there are many new grey areas and implementing this new law is very complex.   For more information on the QBI see my blog called “Can You Take the NEW Qualified Business Income Deduction?”