Individuals and tax return preparers have to contend with six new schedules as they file Form 1040 returns. The newly-organized 2018 Form 1040 is smaller than in previous years. However, the lines of the previous Form 1040s have been shifted to six new schedules.
As with other schedules or forms in the past, an individual must use one of the new schedules only if they need them. Amounts figured on the new schedules are then reported on Form 1040 if necessary to calculate adjusted gross income (AGI), taxable income, etc.
The new schedules do not replace other schedules or forms. For example, Schedule A for itemized deductions would still need to be filed if necessary.
Form 1040 in 2018
The 2018 Form 1040 eliminates the need for either Form 1040A or Form 1040EZ. The 2018 Form 1040 is about a half page in size, and double-sided. Page 1 contains basic information such as the taxpayer’s name, Social Security number, and signature.
Page 2 of the form is used to report the most common items an individual would need to report such as wages, interest income, and dividend income. It is also where taxable income is calculated after taking into account the standard deduction, itemized deduction, the new qualified business income deduction, as well as adjustments to gross income calculated on new Schedule 1.
A few of the more popular credits are also reported on page 2 of Form 1040, rather than on one of the new schedules. These include the:
- child tax credit, including the additional child tax credit,
- earned income credit, and
- refundable portion of the American opportunity credit.
Schedule 1 – Additional Income and Adjustments (AGI)
The new Schedule 1 is used to report additional sources of income from other forms, as well as all of the adjustments to gross income (i.e., “above-the-line” deductions). All of these are items that were previously reported on page 1 of Form 1040 before 2018.
Additional income items includes:
- business income or loss (Schedule C),
- farm income or loss (Schedule F),
- income from rental real estate, royalties, partnerships, S corporations, trusts, etc. (Schedule E),
- capital gain or loss (Schedule D) and other gains or losses (Form 4797), and
- other income such as taxable refunds or credits, unemployment compensation, and alimony.
The adjustments to gross income are those deductions that an individual can claim without itemizing deductions that result in AGI. They include the deduction of certain employee expenses by teachers, reservists, performing artists, etc.
A self-employed individual used the new Schedule 1 to claim his or her deduction for health insurance, retirement plan contributions, and self-employment taxes. Other deductions on Schedule 1 that are commonly claimed include the deductions for contributions to IRAs and HSAs, student loan interest, and alimony.
Schedule 2 – Income Tax
The new Schedule 2 is used if the taxpayer has any additional taxes on income that are not reported directly on Form 1040. This includes
- alternative minimum tax (AMT) (Form 6251), and
- any excess of advanced payments of the premium tax credit made to an Exchange or Marketplace for health care insurance (Form 8962).
Schedule 3 – Nonrefundable Credits
The third schedule is used to report nonrefundable personal credits that are not otherwise reported on Form 1040. These are credits that are claimed less often including the:
- child and dependent care credit (Form 2441),
- nonrefundable portion of the American opportunity or lifetime learning credit (Form 8863),
- retirement savings contributions credit (Form 8880),
- residential energy efficient property credit (Form 5695),
- general business credits if the taxpayer is self-employed, a partner, or S corporation shareholder (Form 3800),
- foreign tax credit (Form 1116),
- various other nonrefundable credits such as the adoption credit (Form 8839), elderly and disabled credit (Schedule R), qualified plug-in electric drive motor vehicle credit (Form 8936) among others.
Schedule 4 – Other Taxes and Penalties
The fourth schedule is used to report other federal taxes or penalties that are not based on the individual’s income. This includes certain employment taxes that the taxpayer is liable for such as:
- self-employment taxes (Schedule SE),
- household employment taxes (Schedule H),
- Additional Medicare tax (Form 8959),
- uncollected or unreported Social Security and Medicare taxes on tip income and wages (Form 4137 and Form 8919).
The new Schedule 4 is also used if the taxpayer is liable for certain additions to tax or penalties. This includes additional taxes reported on Form 5329 for IRAs and other qualified retirement plans, HSAs, Archer MSAs, ABLE accounts, 529 plans and Coverdell ESAs. In addition, the schedule is used to report the repayment of the first-time homebuyer credit (Form 5405), the individual’s “shared responsibility payment” for failing to have minimum essential health care coverage (Form 8965).
Various other taxes are reported on Schedule 4 if not reported elsewhere on Form 1040 such as the net investment income tax reported on Form 8960, and installments of net 965 tax liability or deferred foreign income (Form 965).
Schedule 5 – Other Tax Payments and Refundable Credits
The fifth schedule is used to report any other payments of taxes and refundable tax credits that are not otherwise reported on page 2 of Form 1040. For example, federal income tax withheld from wages or other payments are already reported on line 16 of Form 1040. Thus, an individual is required to file the new Schedule 5 for 2018 only if he or she:
- paid estimated taxes for the 2018,
- elected to apply a portion of any 2017 refund to his or her 2018 tax liability,
- paid any taxes when requesting an extension to file their 2018 return, or
- had excess Social Security or railroad retirement taxes withheld from wages or payments.
Schedule 5 is also used for certain refundable credits also not otherwise reported on Form 1040. These include:
- premium tax credit for health insurance bought through an Exchange (Marketplace) (Form 8962),
- health coverage credit for individuals who receive certain trade or pension benefits (Form 8885),
- the credit for tax on undistributed capital gain of a regulated investment company (RIC) or real estate investment trust (REIT) (Form 2439), and
- the credit for federal tax paid on fuels.
Schedule 6 – Foreign Address and Third Party Designee
The final schedule is used only if the taxpayer has a foreign address or designates another person to discuss the return with the IRS. A third party designee is not the taxpayer’s paid preparer, but a family member such as a spouse or any other person he or she chooses.
By John Buchanan, JD, LLM