Congress promised big tax cuts and simplification of income taxes in its mammoth tax bill, the Tax Cuts and Jobs Act. It certainly delivered on the tax cut promise, but the simplification effort fell short, as evidenced by the IRS’s new Form 1040. Although the new version of the classic individual tax form will be the size of a postcard for 2019, it has six other schedules in addition to Schedule A for taxpayers who choose to itemize their deductions.
The new 1040 would replace the current 1040 along with Form 1040A and 1040EZ. This means that 150 million taxpayers can use the same form, according to the IRS. Taxpayers with straightforward tax situations—no itemized deductions and no income from entities—would only need to file the new 1040, theoretically, with no additional schedules. Taxpayers wanting to claim credits or even teacher classroom expenses, however, will have to file at least one of the six new schedules in addition to the “postcard.” The new numbered schedules include income items that previously appeared as part of the 1040. For example, Schedule 1, “Additional Income and Adjustments to Income,” requests information on taxable refunds, alimony received, unemployment compensation and other income.
Below is a list of the new schedules, which do not fully replace the existing schedules, such as Schedule C, Profit or Loss from Business, Schedule D, Capital Gains and Losses, and Schedule E, for rental and entity income; these regular schedules are remaining.
- Schedule 1, Additional Income and Adjustments to Income
- Schedule 2, Tax
- Schedule 3, Non-Refundable Credits
- Schedule 4, Other Taxes
- Schedule 5, Other Payments and Refundable Credits
- Schedule 6, Foreign Address and Third Party Designee
The new schedules are in draft form only and the IRS has asked for public comments (send to WI.1040.Comments@IRS.gov). It is likely there will be changes before the draft forms are finalized. We will have to await IRS statistics to determine whether the new postcard and additional schedules are truly a simplification of the existing Form 1040. While the postcard may be smaller and appear simpler, figuring out which schedule to include for just one odd income item could instead complicate the process.
W-4 a Burden for Employers
The IRS also has released a draft Form W-4, Employees Allowance Holding Certificate, to adjust employees’ withholdings to reflect lower tax rates and changed filing statuses. Concerns about the new form arose immediately after its release because of the potential burden on employers. In a July 12 letter, the American Institute of CPAs (AICPA) criticizes the new form as complex, putting taxpayer personal information at risk and shifting the burden to employers who will have to guide taxpayers through the maze of required tax calculations.
“Form W-4 is a more challenging task than calculating the number of allowances to claim on the existing 2018 Form W-4. Taxpayers attempting to determine an accurate withholding will face a complex calculation involving personal information or amounts withheld from each paycheck,” the AICPA writes. The new form makes taxpayers include nonwage income, itemized and other deductions, tax credits and the total pay of all lower paying jobs. Because of all the elements going into the complex calculation, an employee could “inadvertently underestimate tax withholding,” the AICPA says.
The AICPA recommends the following changes:
- Provide the taxpayer a simplified method (based on the standard deduction) to estimate his/her total gross income on the Form W-4;
- Allow the taxpayer to withhold a specified additional amount of tax or a reduced amount of tax;
- Include an option for taxpayers who do not want to provide total gross income and who choose instead to provide a specified amount to withhold from each paycheck or to elect the same withholding as the prior year.
The AICPA notes that the Form W-4 has been transformed from a long-standing form that was distributed to new employees when they were first hired to a process that requires employers to calculate their employees’ withholdings on an annual basis. Thus, the risks and responsibility of accurate withholding calculations would be shifted to employers.
The W-4 Form is a draft only at this point but could be finalized soon. The IRS has asked for public comments (send to WI.W4.Comments@IRS.gov), and the final version could change. Employers should follow developments closely because of the far-reaching implications of shifting the burden for accurate withholding calculations to HR departments.