Mariner Wealth Advisors breaks down the new IRS postcard tax return.
Sep. 5, 2018 Article

A New Reality For Some... A Tax Return With Only 23 Lines

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In June, the IRS unveiled the new postcard tax return as part of the GOP’s tax overhaul intended to simplify the federal tax system. The postcard return, which is intended to replace Forms 1040, 1040A and 1040EZ, has a mere 23 lines as opposed to the current Form 1040 which has 79 lines. But, looks can be deceiving.

In addition to the 23 lines on the postcard return, there are six supplemental schedules. Combined, those six supplemental schedules include more than 50 additional line items.

The six supplemental schedules are:

  • Schedule 1 – Additional Income and Adjustments to Income
  • Schedule 2 – Tax
  • Schedule 3 – Nonrefundable Credits
  • Schedule 4 – Other Taxes
  • Schedule 5 – Other Payments and Refundable Credits
  • Schedule 6 – Foreign Address and Third Party Designee

These new supplemental schedules do not eliminate most of the current supporting schedules, such as Schedule C, Schedule D, Schedule E, Form 8960, etc. (Form 8960 is used to calculate net investment income tax (NIIT), a 3.8 percent tax on net investment income when total income is over a threshold amount). Those forms are still required, in addition to the new supplemental schedules. Interestingly, Schedule B for interest and dividend income has been eliminated (Schedule B also includes questions about foreign bank account ownership and foreign trust distributions).

For those taxpayers with only wages, Social Security income or deferred income (i.e. Individual Retirement Account (IRA), pension or annuity distributions) and maybe a small amount of interest and dividends, the new postcard return will be much simpler. For example, a W-2 employee with $1,500 of dividends would only need to file the postcard return in comparison with the 2017 filing requirement of the Form 1040 and Schedule B.

However, the 23 lines will not be sufficient for most tax filers, as they will need to include a supplemental schedule. That means instead of just completing the current Form 1040, they will need to complete the new postcard 1040 and an additional schedule, or more.

For instance, if a taxpayer is entitled to a student loan interest deduction, an IRA deduction or Health Savings Account (HSA) deduction, Schedule 1 will need to be completed in addition to the postcard return. According to 2015 tax year statistics posted by the IRS, over 38 million returns (25 percent of the total returns filed) included some type of statutory deduction such as these. Approximately 25 percent of all taxpayers will now need to file two forms instead of just one. Additionally, taxpayers paying in quarterly estimated tax payments, or who have a tax overpayment credit from 2017, will need to file the postcard return and Schedule 5. In all of the situations noted above, the return filing goes from a total of two pages to three pages.

Not surprisingly, it can be even more complicated. For example, take the common situation of a couple filing joint returns and with two children. One taxpayer is a sole proprietor who files a Schedule C and the other receives W-2 wages. The couple pays daycare expenses for their children. They have some investment income — interest, dividends and capital gains — and their combined annual income is more than $300,000. In addition to the W-2 withholding, they make quarterly estimated tax payments. Under the old filing rules, they would be required to file Form 1040, Schedule C, Schedule B, Schedule D, Schedule SE, Form 8960 and Form 2441. Under the new tax filing rules, they will be required to file the postcard Form 1040, Schedule 1, Schedule C, Schedule D, Schedule 3, Form 2441, Schedule 4, Schedule SE, Form 8960 and Schedule 5. Their tax return increases from seven forms to ten forms… which is not exactly a simplification.

If you have questions regarding the tax information above, please reach out to your wealth advisor.

 

The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. Previous results or outcomes experienced by clients are unique to that client situation. There is no guarantee of similar results or outcomes in the future.

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