The 2018 Form 1040 – “Simplicity” Could Be a Trap For the Unwary

Tax Return Key

By April 15, 2019, individuals are required to file a Form 1040 reporting their income and tax liability for 2018. As a result of the 2017 Tax Act, the IRS overhauled the Form 1040. The Form 1040 has little resemblance to the Form 1040 most taxpayers have been used to filing. Page 1 of the new Form 1040 is mostly a blank white sheet, which at first glance makes it appears that there was an error in printing the Form 1040. A potential problem with the new Form 1040 is that the IRS has oversimplified it. The over simplification may result in many reporting errors by taxpayers. Reporting errors may result in taxpayers paying more money, if the IRS assesses penalties and interest for the errors. Additionally, taxpayers may fail to claim all the deductions or credits to which they are entitled, which may result in an overpayment of taxes.

Page 1 of the 2018 Form 1040 contains the information portion of the old Form 1040 and the signature block from page 2 of the old Form 1040. Page 2 of the 2018 Form 1040 contains only 23 lines, a significant decrease from the 79 lines on the 2017 Form 1040. The first five lines on page 2 list the most common types of income: wages, interest, dividends, distributions from IRAs and pension plans, and social security income. Does this mean that the following types of income are no longer taxable: self-employment income, alimony received if you were divorced before January 1, 2019, capital gains, rental income, income allocated from partnerships or subchapter S corporations; and unemployment compensation? No, these types of income are still taxable. However, you need to know that you have to report these types of income on lines 1 through 21 of Schedule 1.

Now, what about those expenses that you had been able to deduct even if you did not itemize? Line 7 of the 2018 Form 1040 simply states, “if you have no adjustments to income, enter the amount from line 6; otherwise, subtract Schedule 1, line 36 from line 6.” The adjustments listed on lines 23 through 33 of Schedule 1 are the deductions taxpayers were and still are allowed to take, even if they do not itemize, such as the deduction for one-half of the self-employment tax, contributions to IRAs, alimony paid pursuant to a divorce decree entered before January 1, 2019, student loan interest, and a penalty paid on an early withdrawal of savings. To claim these deductions, though, you must complete Schedule 1.

Line 14 simply states “Other Taxes. Attach Schedule 4.” These other taxes, which had been listed on the old Form 1040, include the self-employment tax, unreported social security and Medicare Tax, and household employment taxes. Failure to remember to include any of these extra taxes may result in a letter from the IRS that will also come with a request for a payment of penalties and interest.

Line 16, like line 64 on the old Form 1040, allows a taxpayer to reduce the tax liability by amounts that were withheld from wages and other payments reported on the Form 1099 Information Return. However, if you made estimated tax payments during 2018 or elected to have your 2017 tax refund applied to your 2018 tax liability and want to receive credit for those payments, you now need to complete Schedule 5. You also want to complete Schedule 5 if you overpaid the social security tax as a result of working for more than one employer in 2018. Lines 19 through 21 still allow you to claim a refund if you overpaid taxes during 2018, and line 22 indicates the amount you owe if you did not pay enough.

No doubt the 2018 Form 1040 is shorter than the old Form 1040. However, it is a trap for the unwary. One recommendation: retrieve your 2017 Form 1040 and use it as a guide when completing your Form 1040 for 2018.

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