American Taxation- Individual tax return 2018; changes in Form 1040

30 years is too small a time for a nation but for a tax payer in USA, the tax return for individual for the year 2018, popularly known as 1040 has been changed forever. With lot of discussions and clarity, and building block approach, as Internal Revenue Service, the income tax wing of American Government calls it, the changes qualify as the most expansive in 30 years. Let us understand the rudiments of the changes as under:

• Forms 1040, 1040 EZ, 1040 EZ yield place to 1040. IRS calls it preparing for future changes. The forms for preparing earlier years, obviously, remain the same. As one associated with 1040 since 2001, it is sad but true.
• Schedules 1, 2, 3, 4, 5, 6 supplement the form 1040 with various aspects of tax which are explained, schedule wise.
• Form 1040 (Schedule 1):  Additional income and adjustments to income – Taxpayers use this schedule to report items such as capital gains, unemployment, compensation, prize or award money, gambling winnings or to claim deductions, such as student loan interest deduction, self-employment tax and educator expenses. My earlier articles extensively explained every one of the words used in form 1040.
• Form 1040 (Schedule 2): Tax – Taxpayers use this schedule to report amounts they owe for the Alternative Minimum Tax (AMT) or when they need to make an excess advance premium tax credit repayment.

• Form 1040 (Schedule 3), Non-refundable Credits: Taxpayers use this schedule to claim a nonrefundable credit other than the child tax credit or the credit for other dependents, such as the foreign tax credit, education credits, general business credit. We shall deal with the terms foreign tax credit or general business credit in detail at a later place in the article.
• Form 1040 (Schedule 4), Other taxes: Taxpayers use this schedule to report other taxes they owe and must pay, such as self-employment tax, household employment taxes, additional tax on IRAs or other qualified retirement plans and tax-favored accounts.
• Form 1040 (Schedule 5), Other payments and refundable credits: Taxpayers use this schedule to claim a refundable credit other than the earned income credit, American opportunity credit, or additional child tax credit or have other payments, such as an amount paid with a request for an extension to file or excess social security tax withheld.
• Form 1040 (Schedule 6), Foreign address and third-party designee: Taxpayers who have a foreign address or a third-party designee (other than a paid preparer) use this schedule to report this information. We are aware that even a US Citizen living abroad may report his worldwide income under this schedule.

Due date of return. File Form 1040 may be filed by April 15, 2019. Persons living in other countries get two months extension for filing though the taxes due need to be filed by April 15, 2019.

From the communication issued in detailed form by IRS indicates reduction of tax rates as under:

“Change in tax rates. For 2018, most tax rates have been reduced. The 2018 tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.”

Similarly, standard deduction has been increased as given below:

“Single or Married filing separately—$12,000.

• Married filing jointly or Qualifying widow(er)—$24,000.
• Head of household—$18,000.” Substantial increase, I would say. But this resulted in suspension of personal exemption, partly as the new approach adopted by the authorities.

Increased child tax credit and additional child tax credit. For 2018, the maximum child tax credit has increased to $2,000 per qualifying child, of which $1,400 can be claimed for the additional child tax credit. In addition, the modified adjusted gross income threshold at which the credit begins to phase out has shown a sudden jump to $2,00,000 and $4,00,000, if married filing jointly.

Let us look at new Tax Form 1040 for the year 2018 which contains the historic changes.

Tax Form 1040 has been given at reference for information but discussions on the same is given below: https://www.irs.gov/pub/irs-pdf/f1040.pdf

Discussions on Form 1040 for the year 2018:

Form 1040 has two pages. Page 1 has columns that require essential information like, names of tax payer/spouse, features like blind self/spouse, social security numbers of self/spouse, information of dependents, signature and date. One has to attach schedule 6 in case of foreign address. Interestingly, parents of US Citizen with permanent residency in USA more as a prestige, social status or to make foreign trips never attempted in the past to file US Tax returns containing Indian income which used to be substantial in many cases. Recently immigration authorities have started questions whether the tax payer visiting USA wants to make USA a permanent residency and whether they file tax returns for USA. These instances show the essential emergency of filing taxes on a timely basis and if necessary, carry the copies of latest tax returns and usage of professionals like CPAs so that any tax return can be retrieved at any point of time.

Form 1040, page 2

Page 2 contains other vital statistical information that form the core of the tax return.

1. Details of wages, salaried, tips etc. Forms W 2 are to be attached.

2. Tax-exempt interest / Taxable interest

3. Qualified dividends / Ordinary dividends

 4. IRAs, pensions, and annuities/Taxable amount

5. Social security benefits/Taxable amount

6. Total income.

7. Adjusted gross income.

8. Standard deduction or itemized deductions (from Schedule A)

9. Qualified business income deduction

10. Taxable income

11. 8814 or Form 4972 is to be attached, if needed.

12. Child tax credit/credit for other dependents

13. Subtract line 12 from line 11. If zero or less, enter -0-

14. Other taxes. Attach Schedule 4

15.  Total tax. Add lines 13 and 14

16. Federal income tax withheld from Forms W-2 and 1099

17. Refundable credits:  EIC, Sch. 8812, Form 8863

18. Add lines 16 and 17. These are total payments.

19. Lines 19, 20, 21, 22, and 23 help the tax payer to arrive the estimated tax or amount one owes and finally estimated tax penalty.

Yes, I agree with IRS that with the introduction of software for tax filing in USA, which is a foregone conclusion for any tax payer, calculation of tax overdue, taxes over paid and hence refund or other information that may be needed for tax filing are decided by the tax preparer or CPAs. But this Form 1040 with 2 pages heralds the introduction of a new era which is compulsorily to be noted by everyone.

For a person well versed with the earlier instructions regarding Form No. 1040, it may be a music to hear that beginning in 2018, Qualified business income deduction may be deducted   up to 20% of one’s qualified business income from qualified trade or business, plus 20% of one’s qualified REIT dividends and qualified PTP income. The deduction can be taken in addition to standard deduction or itemized deductions.

Itemized deduction has undergone sea change which will be explained in detail in following paras.

Schedule A – Itemized deductions

Itemized deductions appear as serial number 8 of page 2 of new 1040 form. Let us analyze the additions, retention or removal of items.

The above schedule one of the oldest survivors of the schedules now has 18 serial items as per the list given below:

• Serial number 1, Medical and dental expenses
• Serial number 2-4 calculations
• Serial number 5, State and local taxes
• Serial number 6, other taxes
• Serial number 8, Home mortgage interest and points
• Serial number 9, Investment interest (To attach form 4952, if needed)
• Serial number 10, some calculations
• Serial number 11, gifts by cash or check
• Serial number 12-14, Total gifts calculations including carry overs from earlier year
• Serial number 15, Casualty and theft losses
• Serial number 16, Other list items
• Serial number 17, To add the total amounts
• Serial number 18, If one itemizes even though it is less than standard deduction, it is to be checked here (items 17 and 18 indicate total of itemized deductions)

The writer hopes to write a separate essay on itemized deductions in future and hence detailed explanations have not been given.

This essay being an introduction to the epoch-making introduction of “building block” introduction of tax approach, let us also learn what impact it has on other tax returns.

Let us answer various questions that arise during tax seasons, particularly now when every tax instruction seems to have been changed.

• What about Schedule C which has been used by sole proprietor?
• A copy of above schedule is available at https://www.irs.gov/pub/irs-pdf/f1040sc.pdf.
• A separate article addressing various issues related to above schedule will be written in near future.
• Tax Form 1065 and its applicability – can we have some information?
• Form 1065 is an information return used to report the income, gains, losses, deductions, credits, and other information from the operation of a partnership. A partnership doesn’t pay tax on its income but passes through any profits or losses to its partners. Partners must include partnership items on their tax or information returns. Form can be assessed at https://www.irs.gov/pub/irs-pdf/f1065.pdf
• Since the above form is a conduit partners ultimately pay the taxes, the new instructions being issued on Form 1040, are equally applicable on the partners who would file their individual tax returns.
• Form 1120 and whether any change in the structure for filing of tax returns?

 What’s New Tax rates. For tax years beginning after 2017, the Tax Cuts and Jobs Act (P.L. 115-97) replaced the graduated corporate structure tax structure with a flat 21% corporate tax rate.  The instructions for Schedule J may be studied.

• Base erosion minimum tax. If the corporation had gross receipts of at least $500 million in any one of the 3 tax years preceding the current tax year, Form 8991 has to be completed.
• Domestic production activities deduction (DPAD): The DPAD has been repealed for tax years beginning after 2017 with limited exceptions.
• To assess form number 1120, one may view at https://www.irs.gov/pub/irs-pdf/f1120.pdf.
• Impact of new taxation instructions for individuals under form 1040, has obviously impacted the members of S corporation in form 1120S. We are aware that 1120S is a conduit for its members, just like a partnership firm.
• Purpose of Form: Usage of Form 1120S is to report the income, gains, losses, deductions, credits, and other information of a domestic corporation or other entity for any tax year covered by an election to be an S corporation.
• A corporation or other entity must file Form 1120S if (a) it elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. After filing Form 2553, the tax payer should have received confirmation that Form 2553 was accepted.
• Termination of an election: “Once the election is made, it stays in effect until it is terminated. If the election is terminated, the corporation (or a successor corporation) can make another election on Form 2553 only with IRS consent for any tax year before the fifth tax year after the first tax year in which the termination took effect”. This has been quoted directly from IRS instructions issued on 1120S.
• Charitable organizations use form 990 which consist of schedules, that result as a complicated return.  One must use the appropriate Form 990 for the tax period for which one is filing. Penalties may be assessed for failing to file the proper version of Form 990 for the tax period of the return.
• Form 990 has to be checked for its accuracy of EIN, tax period, group exemption number (GIN). One filing the form has to ensure completion of all parts 1-9. Until the column indicating the signature under part 2 of the signature block is completed, it may not be accepted by IRS. An officer of the organization has to complete this form.

Conclusion

American government, popularly known as Federal Government created history by completely changing the relevant tax codes and reduced the tax rates. Corporations have massive reduction in tax rates which is to enable to the American economy to scale up its size and help more industries return to USA from which most of them for various reasons moved away. For 30 years only cosmetic changes were made but these recent changes have quietly shaken up the tax payers of all sizes. With 21% tax rate for big corporations, the whole world has woken up to face tough competition from the first ranked economy in the world, undoubtedly USA.

Reference

Form 1040 : https://www.irs.gov/pub/irs-pdf/f1040.pdf

Form 1040 instructions: https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

Forms like 1065, 1120, 1120S have been discussed by quoting the sources from IRS instructions.

An attempt has been made to quote as much as possible from IRS web site https://www.irs.gov/.