Tax & Accounting News

Does the New 1040 Really Simplify Tax Preparation?

by
Lee Reams, BSME, EA
on
7/1/2018
Does the New 1040 Really Simplify Tax Preparation?

Does the new Form 1040 really simplify tax return preparation, or does it make preparation more confusing? There has been a significant amount of media coverage related to the recently released draft version of the 1040 tax return for 2018, with most media parroting the government's theme of simplification.

But when you compare the prior 1040 to the new 2018 version, an educated eye can very clearly see that the IRS just divided the traditional 2-page 1040 into what everyone is touting as a simplified 1040 with 2 half-size sheet pages, along with the frequently unmentioned 6 separate schedules that include all of the lines deleted from the prior 1040.

In fact, the prior 1040 (2017 version) had 79 lines, while the new 1040--with its 6 schedules--includes 75 lines. This is not much of a change in the number of lines but a huge increase in the number of schedules.

The obvious theory behind the form is that a significant number of taxpayers only have income from wages, interest, dividends, pensions and Social Security. If so, they can get by with using the new 1040 without using any of the 6 new schedules. Otherwise, things get more complicated than before...

Other Income - If a taxpayer has other income, the new Schedule 1 must be completed along with Schedule C for self-employed income, Schedule D for capital gains transactions, Schedule E for rental income and Schedule F for farm income. Also included are lines on which to enter unemployment compensation, taxable alimony, income from K-1s and other income.

Adjustments to Income - There are 11 possible adjustments to income, with educator expenses, health account contributions, IRA and retirement plan contributions, student loan interest, and alimony payments being the most frequently encountered. These are also included on Schedule 1.

Additional Taxes - Included on the new Schedule 2 are lines for the alternative minimum tax (Form 6251), the tax when parents elect to be taxed on their children's investment income (Form 8814) and one frequently encountered by lower-income taxpayers: the repayment of the ACA's premium tax credit, if the taxpayer received more advance credit than they were entitled to during that year (Form 8962). 

Nonrefundable Credits - The new Schedule 3 includes all of the nonrefundable credits (those that can only offset a taxpayer's tax liability) that used to be included in the old 1040, including the foreign tax credit (Form 1116), the child care credit (Form 2441), certain portions of education credits (Form 8863), certain portions of the child tax credit, the new other dependent credit, residential energy credits (including solar (Form 5695)), and the general business tax credit (Form 8801).  

Other Taxes - Oh yes, we can't overlook the "other taxes" that are tacked onto the income tax. They are listed on the new Schedule 4 and include self-employment tax, the equivalent to wage earners' FICA taxes (Schedule SE); tax on early withdrawals from pension plans (Form 5329); household employment taxes (Schedule H); the ACA penalty for not being insured (worksheet); additional Medicare taxes for high-income taxpayers (Form 8959); the 3.8% net investment income tax, again for high-income taxpayers (Form 8960); and other taxes that are not frequently encountered.

Other Payments and Refundable Credits - The fifth of the new schedules is used when a taxpayer takes credit for prepayments of tax and refundable credits. These include estimated tax payments (Forms 1040-ES); 2017 refund amounts credited to the 2018 tax; the net premium tax credit, the ACA tax credit for low-income taxpayers in excess of the amount used in advance to pay health insurance premiums bought through a government marketplace (Form 8962); and amounts paid with an extension to file. However, to add to the confusion, the earned income tax credit, the refundable portion of the child tax credit, and the refundable portion of the American Opportunity tax credit are not included here; instead, they are listed separately on page 2 of the new 1040 and then combined with the total amount of payments and refundable credits from Schedule 5 for entry on page 2 of the 1040. 

Foreign Address and Third-Party Designee - Schedule 6 covers two issues. The first is to provide the taxpayer's foreign address, if any, which was located directly under the regular address line at the top of the prior 1040. This situation is infrequently encountered but was paired with the field designating a third party with whom the IRS can discuss the return. This designation is almost always used by professional tax preparers, allowing them to handle certain questions related to the tax return directly with the IRS, without the need for a power of attorney. But wait! Back on page 1 of the new 1040, part of the "paid preparers" information block is a check box to select the preparer as the third-party designee, but since the preparer's phone number and PIN--which are requested for other third-party designees--aren't part of the page 1 information, the preparer may have to fill in that information on Schedule 6.

Now, back to the issue of simplification. As you can see, virtually every taxpayer except retired individuals and young, single wage-earning taxpayers will have to complete one or more of the new schedules in addition to the new 1040. This will definitely be confusing and error prone for do-it-yourself taxpayers and additional work for professionals.

Assuming it was the IRS's intention for the new 1040 to handle returns for retired people without any additional schedules, they may have overlooked the help from professionals the elderly need in determining the correct required minimum distributions from retirement plans, how to abate penalties, how to make IRA-to-charity contributions, and how to stay within limits when making gifts and make sure all of the income is accounted for.  

On top of all this is the rather innocuous line #9 on the new 1040 labeled "Qualified business income deduction (see instructions)." That is where the new Sec. 199A 20% pass-through deduction for businesses is entered. This is among the most, if not the most, complicated deductions ever created by Congress. The instructions when finally written will be long, complicated and full of worksheets.

Even for wage earners, the new 1040 has no place to take a deduction for an IRA contribution or reconcile the ACA premium tax credit without the use of an additional schedule--Schedule 1, in these cases.

Bottom line, making a radical revision to a form that has been in use for years is bound to cause confusion, will not simplify a lot and will require the IRS and all tax software providers to make major programming changes, and for what?

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Lee Reams, BSME, EA

Lee Reams, BSME, EA

Editor-in-Chief

Besides his role at CountingWorks as an educator and speaker to thousands of accountants nationwide, Lee manages a technical research service for a large group of tax accountants which sharpens his technical skills. Lee served on the Board of Blackline Systems, is a former Board of Director for the California Tax Education Council, is a Past President of the San Fernando Valley Chapter of Enrolled Agents, Member and Past Director for the California Society of Enrolled Agents.

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