Reminder of Form 1040 Redesign

This is a reminder that the IRS has redesigned the 2018 Form 1040. The Form 1040 will only include the most commonly used income, deductions, credits and payments. All other line items that were on the previous Form 1040 will now be included on six new schedules.

With this redesign the Form 1040A and 1040EZ has been eliminated.

The 2018 Form 1040 has been streamlined to only include the five most common types of income, federal withholding, EITC, Additional Child Tax Credit and the Education Credit. All other types of income, adjustments to income, nonrefundable, refundable credits, other payments and other taxes that existed on the 2017 Form 1040 have been moved to one of six new schedules:

  • Schedule 1 (Additional Income and Adjustments to Income)
    • Includes the remaining income types such as from Schedule C, D, E and F, unemployment compensation, etc. that were shown on the current Form 1040.
    • All adjustments to income such as Educator expenses, IRA contributions, student loan interest, etc.
  • Schedule 2 (Tax) –Includes all lines that are used to calculate total tax such as the regular tax, tax on child’s unearned income, alternative minimum tax, etc.
  • Schedule 3 (Nonrefundable Credits) –Includes all nonrefundable credits such as credit for child and dependent care expenses, education credits, child tax credit and the new credit for other dependents, etc.
  • Schedule 4 (Other Taxes) – Includes all other taxes such as self-employment tax, household employment tax, etc.
  • Schedule 5 (Other Payments and Refundable Credits) – Includes the lines for other payments and refundable credits such as extension payment, credit for federal tax on fuels, etc.
  • Schedule 6 (Foreign Address and Third Party Designee) – Where foreign address and third party designee information is shown if they are applicable.

The 2018 Form 1040 also has the following changes that are a result of the Tax Cuts and Jobs Act:

  • Removal of exemption amount boxes and the total exemptions line.
  • Addition of check box for the new credit for other dependents for each dependent.
  • New line 9 for the new qualified business income deduction (20% deduction for pass-through business income – Sec 199A).

Qualified Business Income Deduction (20% Deduction for Certain Pass-Through Income)

The Tax Cuts and Jobs Act included a provision that may allow an individual to deduct 20% of their domestic qualified business income from a partnership, S Corporation or sole proprietorship (Schedule C or F). This provision is in effect for tax years 2018 – 2025.

For the vast majority of taxpayers (90%) this deduction is calculated as the lesser of:

  • 20% of their net business income or
  • 20% of their taxable income excluding capital gains

This means that for most taxpayers, the deduction is calculated based on the Simplified Worksheet on page 37 of the 2018 Form 1040 instructions.

For the remaining 10% of taxpayers whose income exceeds $157,500 ($315,000 for joint filers) the deduction will be limited as follows:

  • For “specified service businesses” the deduction begins to be phased out once the income limit is reached.
    • Specified Service business is defined on page 34 of the 2018 Form 1040 instructions.
  • For all other businesses the deduction is limited to:
    • 50% of the W-2 wages paid by the business or
    • 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of all qualified property

For these taxpayers the deduction is calculated based on worksheets in the newly revised draft 2018 IRS Publication 535 (Qualified Business Income Deduction).

See the Business owners can claim a qualified business income deduction page on the IRS website for more information.

Reminder of 2018 Itemized Deduction Changes

As the 2019 filing season is almost upon us this is a reminder of the changes to the 2018 itemized deductions.

Here is a summary of the changes:

  • Taxes – Total real estate and state and local income taxes/general sales taxes are limited to $10,000.
  • Interest
  • Home equity loan, home equity line of credit or second mortgage interest is only deductible if it was used to buy, build or substantially improve the home (main or second) that secures the loan.
  • Home mortgage interest is limited to $750,000 for homes purchased on or after December 15, 2017. The limit remains at $1,000,000 for homes purchased before that date.
  • Home mortgage interest remains deductible for interest paid on loan secured by the taxpayer’s main or second home.
  • Personal casualty losses are only deductible if the loss was incurred in a federally declared disaster area.
    • The FEMA disaster declaration number will now be required to be entered on Form 4684 (Casualties and Theft).
  • Miscellaneous itemized deductions subject to the 2% AGI floor are no longer deductible. This includes the Employee Business Expenses that were reported on Form 2106.
  • Medical expense AGI threshold is 7.5% for 2018 for all taxpayers.
  • Itemized deductions are no longer limited for higher income taxpayers.
  • Charitable Contributions
    • The AGI limitation is now 60% of AGI.
    • Payments made in exchange for college athletic seating rights are no longer deductible.

For more details see the final 2018 Schedule A and instructions on the IRS website.

Also, see IRS Publication 5307 (Tax Reform Basics: For Individuals and Families) for more information on the itemized deduction changes and other tax law changes that will affect individuals this filing season.

2018 Federal Return and Taxpayer Expectations

With the 2019 filing season it is important for preparers to be aware that, due to tax reform and the changes to the withholding tables, some of your clients may receive a surprise when they see the results on their 2018 federal return in the form of a lower refund – some may even show a balance due.

This is because of “Tax Cuts and Jobs Act” changes such as the elimination of exemptions, the increase in the standard deduction, the elimination and limiting of certain itemized deduction and elimination of certain other deductions. The taxpayers that are most likely to be affected are:

  • Two wage earner households
  • Taxpayers who itemize
  • Individuals who have non-wage income as well as W-2 wages
  • Individuals with more complex tax situations

Even though the 2018 federal withholding tables reflected the lower tax rates and the increased standard deduction, they could not fully take into account the other tax law changes such as the suspension of dependency exemptions and reduced itemized deductions. This means that for the taxpayers listed above they will have had less tax withheld from their wages than in the past which may result in a lower refund or in some instances switch them from a refund to a balance due.

The IRS encouraged individuals to review their tax situation and adjust their withholding throughout 2018; however, the vast majority of taxpayers did not do this which may result in surprised clients.

By being aware of the situation, preparers can explain to their clients what changed on their return for 2018 and what they can do to change the result of their federal return for 2019.

See the IRS news release of November 14 – For many, time is running out to avoid a tax-time surprise for more information.

Safe Harbor Rule for Autos that Claim Bonus Depreciation

The IRS has issued guidance (IRS Revenue Procedure 2019-13) that provides a safe harbor method for determining depreciation deductions for autos that claim 100-percent bonus depreciation for 2018 – 2022.

The safe harbor method allows the remaining basis of the auto (after the $18,000 bonus depreciation is taken) to be depreciated using the applicable depreciation table in Appendix A of IRS Publication 946 (How to Depreciate Property) for each subsequent year.

IRS Rev. Proc. 2019-13 provides examples of how the safe harbor rule works beginning on page 7.

A taxpayer adopts the safe harbor method by applying it to deduct depreciation of an auto on their return beginning in the second year the auto is used.

For more details IRS News Release IR-2019-14 – IRS Provides Safe Harbor Method of Accounting for passenger automobiles that qualify for the 100-percent additional first year depreciation

When a Rental Activity Can Be Included as Qualified Business Income

The IRS has released a proposed revenue procedure that will allow individuals to treat rental real estate as a trade or business for the QBI deduction as long as certain requirements are met.

Under the safe harbor rule a rental real estate enterprise can be treated as a trade or business for Section 199A purposes for the 2018 tax year if it meets all of the following:

  • Separate books and records must be maintained for rental.
  • The taxpayer must perform 250 or more hours of rental services (defined on page 8 of the proposed revenue procedure) per year.
  • The taxpayer must maintain records regarding the following (after 2018 the records must be contemporaneous):
    • Hours and description of all services performed
    • Dates on which such services were performed
    • Who performed the services

A rental real estate enterprise is defined as an interest in real property held for the production of rents. Taxpayers must either treat each property held for the production of rents as a separate enterprise or treat all similar properties held for the production of rent as a single enterprise.

If a taxpayer has a real estate rental that qualifies to be included in calculating the qualified business income deduction they must attach a signed statement attesting that the rental activity meets the above requirements. The wording for the statement is included on page 9 of the proposed revenue procedure.

See IRS Notice 2019-07 – Section 199A Trade or Business Safe Harbor: Rental Real Estate for more information.

2019 Federal Tax Changes

Below are some of the federal provisions that will go into effect or be changing in 2019.

Provisions that go Into Effect Beginning in 2019:

  • Alimony – For divorce settlements that are finalized in 2019 and beyond
    • Alimony and separate maintenance payments are not deductible by the payor spouse.
    • Alimony and separate maintenance payments are no longer included in income of surviving spouse.
  • ACA Individual Penalty no longer applies. This means that individuals that do not have health insurance for all or part of 2019 will no longer be subject to a penalty.

Changing or Inflation Adjusted Provisions in 2019:

  • Medical Expense Threshold on Schedule A
    • 10% of AGI for all taxpayers beginning in 2019
  • Standard Deduction
    • MFJ: $24,400
    • Single: $12,200
    • Head of Household: $18,350
  • Federal Mileage Rates
    • 58 cents per mile – Business
    • 20 cents per mile – Medical and moving
    • 14 cents per mile – Charity
  • Retirement Contribution Limits
    • IRAs – $6,000 ($7,000 for taxpayers over 50)
    • 401(k), 403(b) or 457 plans – $19,000 ($25,000 for taxpayers over 50)

Tax Preparer Security Awareness

Although the main part of the 2019 filing season has passed it is a good time to remind tax preparers of their obligation to protect the sensitive tax and financial data of their clients. Now is the time to make sure that you as a preparer take the necessary steps to protect your computer system and to make yourself aware of how to protect against email phishing scams and the signs that data theft may have occurred. Cybercriminals are active year-round in sending out phishing emails that are designed to trick preparers into taking action (such as clicking on a link or opening an attachment) that may allow them access to your computer system.

The following is information that the IRS has posted to their website in their continuing efforts to help preparers educate themselves on their security obligations and to protect themselves from the efforts of cybercriminals to steal their client’s information by gaining access to their computer systems:

For additional information see the following on the IRS website:

IRS Accepting Renewal Applications for Expiring ITINs

In this the fourth year of the Individual Taxpayer Identification Number (ITIN) renewal program, nearly 2 million taxpayers will have their ITINs expire at the end of this year.

Therefore any affected taxpayer must submit a renewal application if they plan on using an ITIN that expires at the end of 2019 if they wish to use it on a 2019 federal return that will be filed during the 2020 filing season. The IRS is urging taxpayers to submit their renewal applications as soon as possible in order to beat the rush and avoid refund delays in the upcoming filing season.

Who Should Renew for the Upcoming Filing Season (Filing Season 2020)
At the end of this year the following ITINs will expire and must be renewed if an individual needs to use it on a 2019 federal return:

  • ITINs with middle digits of 83, 84, 85, 86 or 87.
    The IRS will begin sending a CP-48 Notice (You must renew your ITIN to file your US tax return) to these affected taxpayers in the near future.
  • ITINs that have not been used at least once in the last three consecutive years (2016, 2017, or 2018).
  • ITINs with middle digits of 70 through 82 that have previously expired in 2016, 2017 or 2018. Taxpayers with these ITINs can still renew at any time, if they have not renewed already.

How to Renew an ITIN
To renew an expiring ITIN an individual must complete a Form W-7 (Application for IRS Individual Taxpayer Identification Number), making sure to check the “Renew an Existing ITIN” checkbox, and submit it to the IRS in one of the following ways:

  • Mail the completed Form W-7 – along with the original identification documents or certified copies by the agency that issued them – to the IRS address listed on the form.
  • Use one of the many IRS authorized Certified Acceptance Agents or Acceptance Agents around the country
  • In advance, call and make an appointment at an IRS Taxpayer Assistance Center in lieu of mailing original identification documents to the IRS.

For renewals, the IRS does not require a tax return to be attached to the submitted Form W-7.

For more information see the following on the IRS website:

2019 Changes to Form 1040, Associated Schedules and New Form 1040SR

For TY2019 the IRS has made some additional changes to the Form 1040 and associated schedules. It also has created Form 1040SR for seniors.

The IRS moved a few items around on the Form 1040 itself and consolidated items from the schedules. This allowed the IRS to eliminate Schedules 4 – 6 therefore there are only three associated schedules with Form 1040 for 2019.

Here is what changed on Form 1040 and its associated Schedules:Form 1040

  • Moved total from Schedule D (Capital Gain/Loss) from Schedule 1 to Form 1040, page 1
  • Split IRAs and pensions/annuities into two lines – one for IRA distributions and one for pensions and annuities
  • Removed checkbox for health insurance coverage
  • Moved signature area to bottom of page 2
  • Returned foreign address and third party designee to Form 1040 address area (was on Schedule 6)
  • Added line for total additional income from Schedule 1
  • Added line for total adjustments to income from Schedule 1
  • Form 1040 will now print as two pages since the changes that were made takes up more than one half of each page

Schedule 1

  • Renumbered all lines
  • Removed line for total from Schedule D and moved it Form 1040, page 1
  • Added line for entering the original divorce or separation agreement date for alimony paid

Schedule 2

  • Renumbered all lines
  • Includes all other taxes
    •  Part I – Alternative minimum tax and Excess Advance Premium Tax Credit repayment
    • Part II – Other taxes such as SE Tax and Additional Tax on IRAs that were on Schedule 4

Schedule 3

  • Renumbered all lines
  • Has two parts
    • Nonrefundable credits
    • Other payments and refundable credits that were on Schedule 5

New Form 1040SR
This form was mandated by the Tax Cuts and Jobs Act. Here are highlights of this form:

  • For taxpayers 65 or older
  • Has larger font sizes and removed shading around some boxes to improve the readability for taxpayers with declining vision
  • Includes a Standard Deduction table at the bottom of page 1
  • This new form will share the instructions for Form 1040

The addition of this form and the changes to make it easier to read was put in place for those taxpayers who still complete their returns by hand. For those who use tax software to complete their return it will only affect the version of the Form 1040 that will be printed from the program.