The IRS released a draft version of Form 1040 for the 2020 tax year with several important changes for the coming filing season. They include:
- a checkbox for cryptocurrency as the very first question on the form,
- a new line for above-the-line charitable contribution deductions,
- a new line for reporting Economic Impact Payments received in 2020 (recovery rebate credit),
- separate entries to report taxes withheld on Forms W-2, 1099, and other forms, and
- new lines for the COVID-19 relief for the sick and family leave credits and some deferred employment and self-employment taxes.
Cryptocurrency Checkbox on 2020 Form 1040
An individual’s federal income tax return must report income, gain or loss from all taxable transactions involving cryptocurrency, also called virtual or digital currency, such as Bitcoin or Ethereum. The 2019 version of Form 1040 included a Yes/No checkbox that asked if the taxpayer had any financial interest in any cryptocurrency. The checkbox appeared on Schedule 1 used to report income and adjustments that are not entered directly on the front page of Form 1040.
The draft version of the 2020 Form 1040 moves the checkbox to the front page of Form 1040. In fact, it is the very first question asked after the taxpayer’s name, address, and Social Security number.
The change reflects the importance the IRS is giving to compliance for cryptocurrency transactions. While tax prep software should catch the question no matter where it is located on the form, it also avoids a taxpayer from missing the checkbox in case they would not file Schedule 1.
Charitable Deduction for Non-itemizers on 2020 Form 1040
The draft Form 1040 for 2020 includes a new line for an above-the-line deduction for charitable contributions of cash. The deduction is an adjustment to gross income, but the draft provides a separate line for it on the first page of Form 1040 rather than on Schedule 1.
Taxpayers that claim the deduction must also claim the standard deduction rather than itemizing. The deduction is for 2020 only and is limited to $300. The IRS has not yet released draft instructions, but it is assumed the dollar limitation is $600 for married individuals filing jointly.
2020 Economic Impact Payments on 2020 Form 1040
The draft Form 1040 for 2020 includes a new line on page 2 for reporting the Economic Impact Payments (EIPs) taxpayers received from the Treasury and IRS in 2020. The payment is an advance refund of the 2020 recovery rebate credit that was part of the response to the COVID-19 (coronavirus) pandemic.
The maximum EIP is $1,200 ($2,400 if married filing jointly), plus $500 for each qualifying child. The stimulus payments are not included in the taxpayer’s gross income, but the draft version of Form 1040 indicates there will be instructions for reporting the payments.
EIPs were based on a taxpayer’s 2018 or 2019 return, but the credit itself must be reported on the 2020 return. If a taxpayer’s EIP was more than the credit claimed on the 2020 return, the taxpayer does not have to repay any of the EIP. However, if the credit on the 2020 return is more than the taxpayer’s EIP, the taxpayer can claim the difference as a refundable credit against 2020 tax liability.
Withholding and Estimated Tax Payments on 2020 Form 1040
The draft version of Form 1040 for 2020 includes new lines for reporting payments of federal income tax through withholding. For example, there are separate lines for reporting withholding from W-2s, 1099’s, and other forms (such as Form 8959 or Schedule K-1s) rather than combining all withholding on a single line. It is unclear why the IRS is creating separate reporting lines for withheld taxes, but perhaps it provides extra scrutiny of reporting by self-employed taxpayers and independent contractors.
The 1040 draft also moves the line to report the payment of estimated taxes or refunds applied from the 2019 return to the 2020 year. For 2019, these were reported with other payments and refundable credits on Schedule 3 of Form 1040, but the 2020 draft form includes them on page 2 of Form 1040.
Family Leave Credits and Employment Tax Deferrals on 2020 Form 1040
The likely reason for removing estimated tax and other payments from Schedule 3 of Form 1040 is to make room for new items that count as payments of tax. Specifically, the draft version of Schedule 3 for 2020 includes new lines for two COVID-19 relief provisions from the CARES Act.
First, the draft Schedule 3 has a new line for the qualified sick and family leave credits. A self-employed individual can claim a refundable credit for qualified sick or family leave provided to employees during the period from April 1, 2020, to December 31, 2020. The refundable credits are calculated on Form 7202 by a self-employed individual or Schedule H by a household employer.
Second, the draft Schedule 3 has a new line for the deferral of the employer portion of FICA taxes and 50 percent of self-employment taxes due from March 27, 2020, through December 31, 2020. The draft indicates that the 1040 instructions will contain information on how to report these deferrals, but they may also impact an individual who files Schedule SE for self-employment taxes and Schedule H for household employment taxes.
Deferral of Employee’s Share of Taxes
This new line on Schedule 3 is limited to the deferral of the employer portion of FICA taxes as included on Schedules SE and H. The form may have to updated further to reflect the new payroll tax deferral of the employee’s share of FICA taxes. President Trump issued an executive order recently that allows employers to defer the collection and payment of the employee portion of FICA taxes otherwise due from September 1, 2020, through December 31, 2020.
By John Buchanan LL.M, J.D.