We’ve all heard about the sweeping tax changes that have come with the Tax Cuts and Jobs Act. While planning to take the most advantage of the new law is by far the most important aspect of the law, all of these changes will also bring a change to reporting and a new look to the forms we’ve become so accustomed to over the years. With these changes coming soon, we want to provide you with a little insight as to some of the changes you can expect to see with respect to your 2018 individual tax returns.
In August, the IRS released a draft version of the 2018 Form 1040 showing fewer lines on the main form. In 2017, pages 1 and 2 of the Form 1040 had 79 lines. The draft 2018 Form 1040 contains just 23 lines. While not quite the postcard filing that was being touted back in 2016, the form is still quite a bit shorter. So that must mean there really was simplification with the new law, right?
Not so fast. What has disappeared from pages 1 and 2 of the 1040 has actually now created a host of new schedules. The specific line items relating to income have been truncated to just include the most commonly used income items (wages, interest, dividends, retirement income, and social security benefits) with line 6 being a catch-all for all other income and adjustments to arrive at adjusted gross income. The detail for those items is being shown on a new form, Schedule 1.
On the 2017 Form 1040, lines 57-62 outlined any other taxes that were applied. In 2018, all of those lines will be consolidated into one line with an attached Schedule 2 and/or Schedule 4 to provide detail. Similarly, on the 2017 Form 1040, lines 48-54 detailed any tax credits that were being claimed on the tax return. In 2018, those lines have been consolidated into one line with an attached Schedule 3. In the same way, refundable credits were reported on lines 66-73 on the 2017 Form 1040. Those refundable credits will be reported on line 17 with any applicable detailed credits being reported on an attached Schedule 5.
To determine whether taxpayers will itemize or take the standard deduction, taxpayers will take the greater of the two deductions to arrive at taxable income. The number of taxpayers itemizing will drop substantially due to the standard deduction increasing from $12,700 in 2017 to $24,000 in 2018 (married filing jointly) and some new limitations surrounding Schedule A deductions. For those that do still have itemized deductions exceeding the standard deduction, Schedule A will have to be filed.
Another noticeable difference from the 2017 Form 1040 is the absence of the exemption deduction. Moving forward, there will be child tax credits/credits for other dependents, but no exemption deduction. The child tax credit, however, has been doubled to $2,000 per qualifying child.
The qualified business income deduction, which is the new 20% deduction for income from pass-through entities, is being reported on line 9 of the Form 1040. It is important to note that this arrives on the form after adjusted gross income. The qualified business income deduction does not impact adjusted gross income and is a completely separate calculation that reduces taxable income for the taxpayer(s).
The 2018 Form 1040 provides a quick and summarized level of the tax calculation, but to understand the detail, there will be many more schedules than in years past.
If you are interested in seeing the current drafts of the 2018 tax forms to see how different they look, we have included a number of them in the links below.
2018 draft Form 1040: https://www.irs.gov/pub/irs-dft/f1040–dft.pdf
2018 draft Form 1040 Schedule 1: https://www.irs.gov/pub/irs-dft/f1040s1–dft.pdf
2018 draft Form 1040 Schedule 2: https://www.irs.gov/pub/irs-dft/f1040s2–dft.pdf
2018 draft Form 1040 Schedule 3: https://www.irs.gov/pub/irs-dft/f1040s3–dft.pdf
2018 draft Form 1040 Schedule 4: https://www.irs.gov/pub/irs-dft/f1040s4–dft.pdf
2018 draft Form 1040 Schedule 5: https://www.irs.gov/pub/irs-dft/f1040s5–dft.pdf
2018 draft Form 1040 Schedule A: https://www.irs.gov/pub/irs-dft/f1040sa–dft.pdf