15887: 1040 - Changes to the 1040 (Drake18)

Beginning in Tax Year 2018 with the Tax Cuts and Jobs Act, there were multiple changes to the individual package and the form 1040. Below is a summary of all major changes that have occurred beginning in Tax Year 2018. For further instruction on any specific topic, please note the Related Links at the bottom of the article. 

New Form 1040 and Schedules 1-6

The new Form 1040 has been designed with six supplemental schedules that flow back into the 1040. Below is a listing of all schedules as well as what they are used to compute. 

• Schedule 1: Additional Income and Adjustments to Income 
  • This will include items such as taxable refunds, alimony received/paid, capital gains, Schedule E amounts, and other income. 
• Schedule 2: Tax
  • This will include Alternative Minimum Tax calculated on the 6251, advance premium tax credit repayment from form 8962.
• Schedule 3: Nonrefundable Credits
  • This will include items such as the foreign tax credit on form 1116, and child and dependent care expenses from form 2441.
• Schedule 4: Other Taxes
  • This will include items such as Schedule SE, individual responsibility payment, and taxes that would flow from the 8959 and 8960.
• Schedule 5: Other Payments and Refundable Credits
  • This will include items from the net premium tax credit from form 8962, as well as estimated tax payments. 
• Schedule 6: Foreign Address and Third Party Designee
  • This will include the foreign address as well as the third party designee if the designee is not the preparer of the return

New Tax Brackets

 2018 Tax Rates: 

2017 Tax Rates:

The Tax Cuts and Jobs Act has eliminated the personal exemptions for the taxpayer, spouse, and dependents from the taxable years beginning after December 31, 2017, and before January 1, 2026.

Standard Deduction Increased

Changes to Itemized Deductions

Due to the large amount of changes specific to Itemized Deductions, please see article 15816: 1040 - Schedule A (Drake18) regarding these changes.

Kiddie Tax Modified

Beginning in tax year 2018 the taxable income of a child's unearned income is taxed under the rates for single individuals, and taxable income of a child's net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child's ordinary income and his or her income taxes at preferential rates.

Income from Pass-Through Entities

In the past, the net income of pass-through businesses— sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations—was not subject to an entity-level tax and was instead reported by the owners or shareholders on their individual income tax returns, making the income subject to individual income tax rates. 

The Tax Cuts and Jobs Act added Code Sec. 199A, “Qualified Business Income” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is allowed to deduct:

• The lesser of: 
  • The "combined qualified business income amount" of the taxpayer, or
  • 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of the net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year.
• Plus the lesser of:
  • 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or 
  • Taxable income (reduced by the net capital gain) of the taxpayer for the tax year.

Review Code Section 199A Qualified Business Income FAQs for more details. 

Casualty or Theft Losses

Prior to Tax Year 2018, all you would need to do is fill out the 4684 for any loss and this could be deducted (with limitations) on the Schedule A. Beginning in Tax Year 2018 you cannot deduct any casualty or loss unless it is the result of a loss from a federally declared disaster. In the case of a federally declared disaster, the taxpayer would be registered with FEMA and have an account number. Beginning in Tax Year 2018 this account number will be required on the 4684 when filing. Some states may still allow losses from casualties other than from a federally declared disaster. 

Child Tax Credit Increased

Beginning in tax year 2018 the Child Tax Credit has been increased to $2,000. in addition to this increase, the following other changes were made regarding phase-outs and refundability: 

• Phase-out- The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers.
• Non-child dependents- A $500 nonrefundable credit is provided for certain non-child dependents.
• Refundability- The amount of the credit that is refundable has increased to $1,400 per qualifying child. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. 
• SSN Required- No credit will be allowed for any qualifying child unless the taxpayer provides that child's SSN or a Work Authorization Permit from Homeland Security. 

 ABLE Account Changes

ABLE accounts allow individuals with disabilities and their families to fund a tax- preferred savings account to pay for qualified disability related expenses. The annual limitation on contributions in the past was the amount of the annual gift tax exemption, however the Tax Cuts and Jobs Act increased the contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary.

The following changes were made:

• After the overall limitation on contributions is reached ($15,000), an ABLE account's designated beneficiary can contribute the lesser of:
  • The federal poverty line for a one-person household
  • The individual's compensation for the tax year

For further information, please see Publication 5307.

Alimony

Per the Tax Cuts and Jobs Act, divorces finalized after December 31, 2018 will not have the provision to allow the payer to deduct alimony payments from their income tax. In turn, the recipient will not have a requirement to claim alimony as part of their taxable income.

This will not affect:

• Divorces finalized on or before December 31, 2018 or
• Payments stated to be other than alimony.

Any divorce agreements in place on or before December 31, 2018 will continue unaffected by this change, unless both parties agree to modify their divorce agreement to conform to the new amendments of the tax law. 

According to the IRS 2018 Draft Instructions:

Alimony received will no longer be included in your income if you entered into a divorce or separation agreement on or before December 31, 2018, and the agreement is changed after December 31, 2018, to expressly provide that alimony received is not included in your income. Alimony received will also not be included in income if a divorce or separation agreement is entered into after December 31, 2018. For more information, see Pub. 504.

Since this change affects divorces finalized after December 31, 2018, no changes will be seen to data entry in Drake18.