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:
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.
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:
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’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.
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.
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/.