Many changes in store for Form 1040 and related schedules

Editor: Todd Miller, CPA

Tax forms change every year. Some changes are more significant than others, some make tax return preparation and review simpler, and some make it harder. Everyone should remember the 2018 “postcard” that was multiple pages that wasted paper when printing and made reviewing much harder for those who “knew where things should show up” on a tax return. Well, the IRS may never go back to the old form, but some of the changes this year should make the return easier to review. This item looks at some of the changes on the 2021 draft Form 1040, U.S. Individual Income Tax Return, (available at www.irs.gov) and related schedules to help practitioners prepare for next busy season.

The first change on the 2021 Form 1040 is the wording on the virtual currency question. In 2020, the question was as follows: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” (emphasis added). The question on the 2021 return is as follows: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?” (emphasis added). This change is a step in the right direction to have the question actually match potential reporting events on the current-year tax return, since the disposition of virtual currency is more likely to be a reportable event than the acquisition of virtual currency.

Changes on page 2 of the 2021 Form 1040 are where one begins to see the theme of the 2021 changes. The 2021 forms and schedules provide reporting locations for items that previously were amounts to be written in on the dotted lines, such as nontaxable combat pay and prior-year (2019) earned income for purposes of the earned income tax credit on new lines 27b and 27c. There is also a description change to line 28, “Refundable child tax credit or additional child tax credit from Schedule 8812,” which foreshadows the revised Schedule 8812, Additional Child Tax Credit, which will have to capture the pre-payments of the child tax credits that started being distributed in July 2021. The 2021 Schedule 8812 has been expanded from one page to three, and calculations that were previously done on worksheets are now reported directly on the form. Additionally, Part III of Schedule 8812 calculates the additional tax due to any excess advance child tax credit payments. The remaining changes to the 2021 Form 1040 are primarily updates to the year or a line reference.

The more significant changes to the 2021 Form 1040 are to Schedules 1, 2, and 3. These are the schedules that allowed for the conversion of the 2017 Form 1040 to the 2018 “postcard.” Just a first glance at the draft schedules shows that there has been a dramatic change. In 2020, Schedule 1, Additional Income and Adjustments to Income, had 22 line items and was less than a full page. In 2021, Schedule 1 has 26 line items, and it is two full pages. This is where the review process gets easier. Line 8, “Other Income,” previously asked taxpayers to list the type and amount, and most software said “see statement” instead of listing the type of other income. The 2021 Schedule 1, line 8, has items “a” through “p” (plus “z”) and includes the following: Net operating loss (8a); gambling income (8b); and cancellation of debt (8c). So instead of flipping to the statements at the back of the return to see what is in other income, all of the usual and some of the less usual items will be listed on Schedule 1.

Page 2 of the 2021 Schedule 1 (available at www.irs.gov) is for adjustments to income and is very similar to the 2020 version except for the removal of the tuition and fees deduction, since it is not applicable this year, and the addition of the Archer medical savings accounts deduction as a separate line. However, there is a new line 24, “Other Adjustments,” which has items “a” through “k” (plus “z”). The items listed are varied, and most are not seen very often. Some examples that might be more common are the following: jury duty pay (24a); deductible expenses related to income reported on line 8k from the rental of personal property engaged in for profit (24b); attorneys’ fees and court costs for actions involving certain unlawful discrimination claims (24h); and excess deductions of Sec. 67(e) expenses from Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc. (24k). Any items not listed should be listed under 24z, “Other Adjustments,” where it asks for types and amounts.

Schedule 2, Additional Taxes, (available at www.irs.gov) has been expanded from 10 line items in 2020 to 21 line items in 2021. The primary changes are that instead of having boxes to check and combined amounts, each item has its own line, such as Form 4137, Social Security and Medicare Tax on Unreported Tip Income, on line 5 and Form 8919, Uncollected Social Security and Medicare Tax on Wages, on line 6. Line 8 from the 2020 Schedule 2 is now divided into line 11, “Additional Medicare Tax,” for the tax from Form 8959, Additional Medicare Tax, and line 12, “Net Investment Income Tax,” for the tax from Form 8960, Net Investment Income Tax — Individuals, Estates, and Trusts. Line 8c, “Other Taxes,” from 2020 has been divided up into lines 13—16 and includes a separate line item for each type of tax.

Schedule 3, Additional Credits and Payments, (available at www.irs.gov) has also increased from one page to two and from 13 lines to 15. Part I for nonrefundable credits has line 6, “Other Nonrefundable Credits,” that has items “a” through “l” plus “z.” Some of the more common credits that now have their own line include: the general business credit (6a); the credit for prior-year minimum tax (6b); the adoption credit (6c); and the qualified electric vehicle credit (6i). Schedule 3, Part II, “Other Payments and Refundable Credits,” has not changed much except that a few additional items are included on the line for other payments or refundable credits such as the following: credit for repayment of amounts included in income from earlier years (13d); net Sec. 965 inclusions (13f); and the credit for child and dependent care expenses from line 10 of Form 2441, Child and Dependent Care Expenses (13g).

Retroactive tax law changes may bring additional updates to Form 1040 and related schedules, but hopefully this preview of what is to come will help you be prepared for next busy season.

EditorNotes

Todd Miller, CPA, is a tax partner at Maxwell Locke & Ritter in Austin, Texas.

For additional information about these items, contact Todd Miller at 352-727-4155 or taxclinic@cpamerica.org.

Contributors are members of or associated with CPAmerica Inc.