According to Adam Smith's Canons of Taxation, the tax compliance function in any society needs to be convenient. This has not always been the case for many seniors in the United States. Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, currently used by eligible taxpayers under age 65, is not available to older taxpayers. Seniors age 65 and older may also not find relief in filing Form 1040A, U.S. Individual Income Tax Return, because of its $100,000 cap on taxable income and its prohibition on itemized deductions (a drawback admittedly lessened by the enactment of P.L. 115-97, the law known as the Tax Cuts and Jobs Act (TCJA), which greatly limited many of those deductions and increases the standard deduction).
The Bipartisan Budget Act of 2018 (BBA), P.L. 115-123, passed on Feb. 9, 2018, attempts to alleviate this burden, beginning in 2019, for many senior citizens in the United States. The BBA requires the "Secretary of the Treasury, or the secretary's delegate, to make available Form 1040SR" (Bipartisan Budget Act of 2018, §41106), which would be similar to Form 1040EZ except that anybody age 65 and older may use it. In fact, only taxpayers who are 65 and older may use it. During the 37-year history of Form 1040EZ, seniors have never been able to use that form.
The BBA, however, does not preclude older taxpayers from using Form 1040A or Form 1040 when filing their returns. It simply offers them another option, especially if they don't use the services of a tax professional.
Form 1040SR is not a new concept. Legislation was first introduced in the U.S. House of Representatives in 2004, with the Simple Tax for Seniors Act of 2004 (H.R. 4109, 108th Cong.), which was meant to alleviate what House members called a "senior penalty" and an overt act of "age discrimination" (108 Cong. Rec. 11270 (2004)). House members also referred to the proposed Form 1040S, a precursor to the soon to be implemented Form 1040SR, as a "discount," similar to discounts received from other establishments such as movie theaters and restaurants (108 Cong. Rec. 11270 (2004)). The proposed Form 1040S was intended to give seniors the ability to complete their tax returns in less time, while making the form potentially easier to read with enhanced fonts (108 Cong. Rec. 11274 (2004)).
Despite receiving unanimous support from its members, the House bill was never passed into law. However, it did sow the seeds for Congress and, indirectly, the IRS, to keep addressing this issue. In 2017, the Senate and House brought forth legislation titled the Seniors' Tax Simplification Act of 2017 (S. 157, H.R. 2721, 115th Cong.), resurrecting Congress's attempt to create a simpler tax form for seniors, renamed Form 1040SR. This new attempt, though introduced as identical legislation in both the House and Senate, was also mentioned as a possible addition to the TCJA. It was finally enacted in the BBA.
With each attempt to create a simpler tax return for seniors, new versions of the bill, based on restated language from previous bills, were praised and supported by organizations such as the AARP, the 60 Plus Association, the Association of Mature American Citizens, Americans for Tax Reform, and the National Taxpayers Union (Sen. Marco Rubio, R.-Fla., press release, "Senators Introduce Legislation to Simplify Tax Filings for Seniors" (March 5, 2013)).
The need for simplification continues
On May 31, 2007, the Treasury Inspector General for Tax Administration (TIGTA) came out with a report titled Opportunities Exist to Help Seniors and Many Other Taxpayers That Repeatedly Make Mistakes on Their Individual Tax Returns, which mentioned some of the common mistakes made by seniors when filing their tax returns. According to the report, the two most common mistakes seniors made in calculating their taxable income are miscalculating Social Security benefits and the standard deduction, in particular the additional standard deduction for taxpayers 65 and older and/or blind. Looking at these errors, TIGTA found that 95% of these mistakes were made by seniors who filed their own returns. Also, the average age of these taxpayers was 72, with 24% of the seniors being at least 80 or older.
In the report, TIGTA made two recommendations to improve "the forms and instructions" to help seniors file more accurate returns. The first recommendation was to clearly inform the senior taxpayer that help is available by calling the IRS's toll-free number, along with possibly seeking assistance from the Tax Counseling for the Elderly centers throughout the country, which provide free tax services to seniors.
The second recommendation noted that the current placement of the standard deduction on Form 1040 (e.g., Form 1040, Form 1040A, or Form 1040EZ) is confusing to seniors because it only shows the basic standard deduction. Many seniors only put the number that appeared in the left-hand margin of the form on Form 1040A or Form 1040, missing the opportunity to take the additional standard deduction, since it does not appear on the face of the form.
Form 1040SR: A new era
Form 1040SR, according to Section 41106 of the BBA, should be as "similar as practicable to Form 1040EZ." This form will also be available only to individuals who reach age 65 by the end of the tax year, which is currently not allowed when filing Form 1040EZ. However, Form 1040SR will not be made available to seniors until the year after BBA was enacted, Feb. 9, 2018. Therefore, the new form will not be available to seniors until 2019, meaning senior taxpayers will not be able to use this form until the 2020 filing season.
The age requirement is not the only thing that makes Form 1040SR unique from Form 1040EZ. Where Form 1040EZ allows a taxpayer to include only W-2 wages, along with tips, unemployment compensation, Alaska permanent fund dividends, and taxable interest up to $1,500, the BBA expands the definition of what gross income items may be included on Form 1040SR. Additionally, seniors will now be able to include on Form 1040SR their Social Security benefits, as defined in Sec. 86(d), distributions from qualified retirement (under Sec. 4974(c)) and annuities or other deferred arrangement plans, interest and dividends, and capital gains and losses taken into account in determining adjusted net capital gain. (BBA §41106).
Implicitly under Section 41106 of the BBA, there is no limit on the amount of interest and/or dividends, including tax-exempt interest and/or dividends, that may be included in gross income, unlike on Form 1040EZ. Also, "adjusted net capital gain" has the same meaning as Sec. 1, which defines "adjusted net capital gain" as the sum of net capital gain (i.e., excess of long-term capital gains over short-term capital losses), reduced by unrecaptured Sec. 1250 gain and the 28% capital gain rate, and qualified dividends (Secs. 1(h)(3) and 1222(11)).
The BBA also requires that Form 1040SR be made available without regard to the "amount of any item of taxable income" or to any "total amount of taxable income" for the tax year (BBA §41106). Taxable income is defined in Sec. 63 as gross income less any deductions allowed under Chapter 1 of the Code, other than the standard deduction (Sec. 63(a)). Since gross income as defined in Sec. 61 is limited to the items mentioned above, when preparing and filing Form 1040SR, the question becomes what deductions are allowed in calculating taxable income. Because the BBA refers specifically to taxable income, and the new Form 1040SR will be as "similar as practicable to Form 1040EZ," there presumably will be no deductions from adjusted gross income (AGI) included on the new form, even though Sec. 63 allows for these deductions under Chapter 1.
Another interesting question surrounding Form 1040SR will be if it gives seniors the option to take the greater of the standard deduction or itemized deductions, which is not allowed on the current version of Form 1040A. This question arises because itemized deductions are allowed under Chapter 1 of the Code in calculating taxable income, but limiting deductions to the standard deduction is consistent with the law's instruction to make the form as "similar as practicable to the current Form 1040EZ." However, if a senior taxpayer can itemize deductions, similar to the 1040S created by the IRS in 2004, another line item may have to be included in calculating gross income, and ultimately taxable income, for any state tax refunds and/or credits under the "tax benefit rule" of Sec. 111.
Also, any deductions, and/or credits specifically available to the elderly will probably need to be included on Form 1040SR, such as the additional standard deduction for being 65 and older (Sec. 63(f)), and the credit for the elderly and disabled (Sec. 22). However, with the proposed one size fits all "simplified Form 1040," and the six supplemental schedules to the return, which may include credit items on one of these supplemental forms, this may defeat the original purpose and intent of Form 1040SR (Tankersley, "The New Tax Form Is Postcard-Size, but More Complicated Than Ever," The New York Times (June 25, 2018)).
As for the earned income tax credit (EITC), which is available only for taxpayers ages 25 to 64 and is included as a line item on Form 1040EZ, an interesting question is whether both spouses need to be 65 or older to file a joint Form 1040SR. If both spouses need to be 65 or older, since the BBA says the form will be "available only to individuals who have attained age 65," the EITC will probably not be included as a line item since at least one spouse needs to be "at least 25 but under age 65" to claim the EITC (Sec. 32(c)(1); BBA §41106).
Since Form 1040SR allows a taxpayer to report total taxable income, regardless of amount, there will also probably need to be line items for any alternative minimum tax (AMT) and estimated tax payments, since many seniors will probably be retired and likely not have any federal tax withheld from their income, which may be largely unearned income.
Furthermore, will the new Form 1040SR require that the taxpayer be single or married filing jointly, when filing his or her return, similar to Form 1040EZ, or can "surviving spouses," as well as a couple filing separate returns or someone who is head of household, use this form? This is one of the many questions the IRS will need to address in the coming year when drafting Form 1040SR. There are also concerns about the ancillary forms that may need to accompany Form 1040SR, such as Schedule D, Capital Gains and Losses, Form 8949, Sales and Other Dispositions of Capital Assets, etc. (Hoffman, "For Now, New Form 1040SR for Seniors Puzzles Some Tax Pros," 158 Tax Notes 1860 (March 26, 2018)). If these additional forms must be used, does it really make filing Form 1040SR simpler than the current options available (e.g., Form 1040A or Form 1040)?
Waiting for the IRS form
It will be interesting to see how the IRS drafts Form 1040SR, especially with the recently proposed, simplified, Form 1040 for 2018 (see "Form 1040 to Be Shorter but With More Schedules").
Will the Form 1040SR be similar to the version drafted by the IRS in 2004, or will it be similar to the current Form 1040EZ? Or will it be similar to the proposed simplified Form 1040, but geared more toward the elderly, with some of the recommendations from the 2007 TIGTA report being taken into account? For example, on the new Form 1040SR, maybe the IRS's toll-free number or Tax Counseling for the Elderly centers information can be included on the form itself. Furthermore, as suggested in the TIGTA report, both the basic and additional standard deduction could be included on the face of Form 1040SR itself, creating less confusion for seniors when calculating their taxable income.
In the end, the IRS has the opportunity to make tax compliance a little easier for today's seniors. The new Form 1040SR needs to be simpler, aesthetically pleasing to the eye, less complicated, and, most of all, less time intensive. The form must also be cost beneficial to both the IRS and senior taxpayers, along with giving tax practitioners the opportunity to help create, in conjunction with the IRS, the best form possible before it is implemented in 2019. The form should not just be an add-on to the current proposed, simplified, Form 1040.
John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting at the Charles H. Dyson School of Applied Economics and Management, Cornell University, Ithaca, N.Y. Matthew Geiszler, Ph.D., is an assistant professor of accounting at Ithaca College, also in Ithaca. Luke Richardson, CPA, is an instructor in the Lynn Pippenger School of Accountancy at the University of South Florida in Tampa. To comment about this article or to suggest an idea for another article, please contact Sally Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com.