Tax Cuts and Jobs Act New 1040 Tax Return Forms
As 2018 nears the end of the year, the IRS is publishing the new 1040 tax returns and the benefits of the Tax Cuts are now transparent and visible to the lay eye. The 1040 tax returns for 2017 and previous years was approximately 78 lines long and took up 2 full pages. The new 2018 1040 tax return is 23 lines long and fits on half of an 8×11 piece of paper if printed front and back. Gone are the 1040EZ and the 1040A. Everyone will file this new, simpler, shorter 1040 tax return. If you need to file information for above the line deductions, like student interest deductions, self-employment tax deductions, self-employed health insurance deductions, contributions to a Health Savings Account or to an IRA or to a self-employed 401K or similar qualified retirement plan, you will provide that information on new schedules identified as Schedules 1, 2, 3, and 4.
The standard deductions for individuals, married couples, and for head of household filers are almost doubling. Therefore, about 80% of tax filers will take the standard deduction rather than preparing a Schedule A for itemized deductions. Personal exemptions and dependency exemptions no longer exist. Those amounts will be captured in the standard deduction amounts for most filers. Individuals who were born before January 2, 1954 and/or who are blind will check a box towards the top of the new 1040 and will get to increase their standard deduction amounts, much like such individuals took standard deductions and personal exemptions.
For self-employed individuals who are under the modified adjusted gross income threshold amounts, you will be very happy with the new Line 9 on the new 1040 income tax returns, where we self-employed individuals will get to take a 20% deduction against our business income, known as the qualified business income deduction. After completing a Schedule C or getting a K-1 from our 1065 Partnership or LLC income tax returns or a K-1 from our S Corporation tax returns, Form 1120S, we will fill out the new Schedule 1 and list our net business income on Line 12 of the new Schedule 1. That net business income amount will then be reduced by 20% for most individuals and you will insert that amount on Line 9, thereby reducing your taxable income by 20%.
For instance, if Joe Handyman or Joe Handyman, LLC has gross income of $150,000 and expenses of $50,000, Joe has $100,000 of net income that will be reported on either Joe’s Schedule C or on Joe’s 1065 tax return. This amount is reported on Line 12 of Schedule 1. Then, for Line 9 of the new 2018 1040 tax return, Joe would report a qualified business deduction amount of $20,000 ($100,000 net income x 20%). Thus, Line 9 will reduce Joe’s taxable income by $20,000.
I prepared a tax return for Joe Handyman for 2017 and 2018 using $150,000 gross income and $50,000 business expenses for a net income of $100,000. I treated Joe as a single person with no dependents and taking the standard deduction. I gave Joe a self-employed insurance deduction of $3,500, an HSA contribution of $3,500, and a 401k contribution of $18,000 for both 2017 and 2018.
Under the 2017 tax code, Joe had a tax liability of approximately $23,500. Using the 2018 tax code, Joe had a tax liability of approximately $18,500. Therefore, all things being equal and only using the new tax code, Joe owes the IRS $5,000 less in taxes in 2018 than he did in 2017.
That extra $5,000 in Joe’s pocket may be money he can use to buy a car for a teenage driver in the house. Or, that $5,000 could pay for a Caribbean cruise for a family of 4. Or, Joe could use the money to buy new tools for his handyman business.
Either way, I hope this extra $5,000 in Joe’s pocket makes for a Merry Christmas (if Joe closes his books and calculates his likely tax liability in the first few days of January, like me) or for a fun spring break (if Joe waits until March or April to close his books and prepare his tax return, like most taxpayers).
