Proposed New IRS Tax Form 1040 Breakdown

Remember that New IRS Tax Form 1040 Postcard?

Hmmm, I seem to remember a promise about a new IRS tax form. Do you? The logic was that on the new IRS Tax Form 1040 draft the person filing will be able to file your income tax return using a postcard. This article will give you a break down the proposed new IRS Form 1040.

Is the IRS Tax Form 1040 really the size of a postcard?

The reality of the new 1040 form is a far cry from a postcard. Although the administration insists that it has made the tax filing process more simple. Preparing your tax return, just looks different; however, we wouldn’t say it was more easy. Oh and that postcard has a whole bunch of schedules to file.

Comparing the Old and New 1040 Forms

After comparing the old 1040 to the new draft version we see that the redesign did little. Other than change the IRS 1040 from the previous two-page form to two half-size pages, you will learn there are six schedules that will require separate filing. All but four of the 79 lines from the old version remain on the new Internal Revenue tax form. They’re just broken up differently. Unless all of your income comes from wages, interest, dividends, pensions and Social Security, you will now have more schedules to fill out than you did before. Therefore, you still have a lot of work ahead of you.

The IRS 1040 Tax Form is Still Two-Pages Long

Six Additional Schedules

How much new work does will the new tax form make you do? Let’s just say, “There’s a Schedule for that!” Yup, six additional schedules will be the requirement when filing your prposed new tax forms.

Here’s a quick rundown of the six new schedules:

Schedule 1 – Other Income

Yup, there’s a Schedule for that! In fact, more than one schedue for all of the above. Taxpayers with self-employment income will need to fill out Schedule 1 and Schedule C. Those who have income from capital-gains transactions will have to complete Schedules 1 and D. Those with rental income will fill out Schedules 1 and E. And, those with farm income will complete Schedules 1 and F. So, just like previous tax filings, the income and expense on Schedules C, D, E and F will come from other forms, schedules and worksheets. The new form presents nothing simple there in this case. Schedule 1 will also be the place to report taxable alimony, unemployment, K-1, and other income. This includes the 11 possible adjustments to income, including health account contributions, IRA and retirement contributions, educator expenses, and student-loan interest.

Schedule 2 – Adjustment to Income

Taxpayers who are parents and who choose to be taxed on their children’s investment income will use Schedule 2. They will also use Form 8814. This schedule is also used alongside Form 6251 for those who are subject to the alternative minimum tax. Lower-income taxpayers who have got more of the premium tax credit than they should have received will also use Schedule 2 and Form 8962 for repayment, as required under the Affordable Care Act (ACA).

Schedule 3 – Non-Refundable Credits

Taxpayers who are eligible for nonrefundable credits will use Schedule 3 (along with other forms, depending upon where their credits are from). The taxpayers will use Form 1116 if these credits are connected to a foreign tax credit, Form 8863 if they are from education credits, and Form 2441 for childcare credits. Schedule 3 is also the place to enter certain recently introduced portions of the child tax credit (and other dependent-based credits) and any residential energy credits. Those who are eligible for a general business tax credit will combine Schedule 3 with Form 8801.

Schedule 4 – Additional Taxes

Those who are responsible for additional taxes in addition to those due for income need to use Schedule 4. What are these additional taxes? They include the tax on early withdrawals from pension plans. These should be entered on Form 5329. The taxes due from self-employed individuals in lieu of payroll taxes, which aren’t deducted for those individuals (using Schedule SE), and household employment taxes using Schedule H. Other fees recorded on Schedule 4 include the penalty for not purchasing insurance according to the rules of the ACA, the net investment income tax of 3.8% for high-income taxpayers (using Form 8960), and the additional Medicare taxes for high-income taxpayers (using Form 8959).

Schedule 5 – Other Tax Credits

Do you prepay your taxes and then claim a credit for having done so? If so, you’ll need to fill out Schedule 5, regardless of whether you’re claiming this credit on Form 1040-ES. This includes any 2017 refunds that you credit to the current year’s taxes, payment that you made when requesting an extension to file, and the net ACA premium tax credit for health insurance purchased through a government marketplace (using Form 8962). The idea behind the new IRS Tax Form 1040 is to make it more simple, but process for the new Schedule 5 seems much more complex than the old one.

The Schedule 5 does not allow for the refundable portion of the child tax credit, the earned income tax credit, or the refundable portion of the American Opportunity tax credit. Those credits, after completing the required backup forms, are entered on the 1040 itself and then combined with the payments and credits from Schedule 5.

Schedule 6 – Taxpayers with a Foreign Address and Third Party Contact Information

Taxpayers who have foreign addresses were once able to enter those addresses directly at the top of the 1040 form. Under the new tax form design, that information is now put on Schedule 6. The same form will be used to enter the contact information of any third party whom the IRS should reach out to if they have questions about certain items on the taxpayer’s return (without the need of providing power of attorney). Making matters more complex is the fact that, even though the new 1040’s first page also has a spot for paid preparers to provide their contact information, this area does not provide a space for the preparer’s PIN or phone number. We told you there was a schedule for everything. Now do you see it isn’t as simple as the single postcard?

Are the New IRS Schedules More Simple?

While the new IRS tax form 1040 will look simpler, the new schedules will just complicate it. So, are the new schedules and the shorter 1040 easier for taxpayers? Under the new process, pretty much everybody outside of retirees and single, wage-earning taxpayers will need to fill out one or more of the schedules in addition to the 1040. There’s a good chance that people are going to end up very confused or worse. There is an even better chance that they will make mistakes if they decide to take prepare their taxes on their own. On this new 1040 tax form, even retirees will likely need assistance, as many of them will need help with the minimum-distribution calculations for their retirement plans, as well as with other issues such as the gift tax limits and IRA-to-charity contributions.

New Pass-Through Deduction

If it already seems clear that the new forms are actually more complicated than the old ones, we’ve saved the most confusing part for last. The new 1040 has a line labeled “qualified business income deduction” that connects directly to a new deduction under the tax reform act. This deduction is generally 20% of pass-through income for businesses, and its calculation is highly complicated. This deduction will apply to nearly all self-employed taxpayers, landlords, members of partnerships, and shareholders in S corporations. Although the instructions for this calculation are not yet final, they are almost certain to be long and difficult to follow, with lots of madatory entries to fill out in various worksheets.

What About the ACA Premium Tax Credit and IRA contribution deductions?

Finally, some have made note that wage earners who need to reconcile their ACA premium tax credit will no longer find a line for this on the 1040. Instead, they’ll need to use Schedule 5 or 2 for the ACA credit and Schedule 1 for the IRA deduction.

So, what’s going to happen with the new IRS Tax Form 1040?

Of course, the newly proposed IRS Tax Form is not final; it is only a draft. So, the IRS is asking for thoughts and comments. So, there is a good chance that some changes will happen to the final version. Let’s hope that the IRS really does make something more simple regarding all these schedules that go along with the new IRS 1040 tax form.

Do you have questions about the new IRS tax form 1040 draft?

Do you have tax questions during the year? Would you like to do some tax planning? I invite you to call us. You can reach Alex Franch at Alex Franch, BS EA at 781.849.7200 or email the office at contactus@worthtax.com to secure the help you will most likely need to get ready for tax season. You can also book an appointment online here and you can meet with any of our tax experts.

Alex Franch, BS EA

Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.

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