Tax reform has been front and center on taxpayers' minds for more than a year now, and millions are looking forward to seeing what impact the new tax laws will have on the amount they owe the IRS. Many are hoping for even bigger refunds than they've received in past years, although some fear that their tax burden will actually get heavier under tax reform.
Regardless of what happens to your tax bill for the 2018 tax year, one big change is certain: the form you'll file your tax return on will look a lot different than it has in past years. In fact, many who've gotten used to getting to file their returns on shorter forms like 1040A and 1040EZ will get a big surprise -- because those forms are history, and everyone's now going to file their taxes on the same 1040 form.
How the old rules worked for tax forms
Under previous law, there were three forms that taxpayers used to file their annual returns. The catch-all form was the full Form 1040, which any taxpayer could use for filing. The biggest benefit of the 1040 was that it included spaces to let you get any tax break that you qualified to take. Because of its versatility, though, it was by far the longest of the three tax forms taxpayers had available to them.
However, the two simpler forms were available for many taxpayers. The simplest form, Form 1040EZ, was allowed for taxpayers who met the following criteria:
- Income had to be $100,000 or less.
- All earned income needed to be from regular employment as reported by an employer.
- Only those filing under the single or married filing jointly filing statuses could use the form.
- If you were 65 or older or had dependents, you weren't able to use Form 1040EZ.
- Those with dividend income or capital gains couldn't use the form.
- Interest income was limited to $1,500.
- You couldn't itemize deductions, claim adjustments to income for things like IRA contributions, or take credits other than the earned income credit on Form 1040EZ.
Even with those restrictions, about one in six taxpayers qualified to use Form 1040EZ.
Another form, Form 1040A, served as a Goldilocks-like middle-ground for taxpayers. It allowed taxpayers to claim any filing status, as well as several tax credits relating to children, child care expenses, educational costs, retirement savings, or the elderly. Form 1040A covered income including both interest and dividends, as well as Social Security, retirement plans, and capital gains paid by mutual funds.
However, Form 1040A still had limitations. It had maximum earnings of $100,000, and it also didn't allow taxpayers to itemize deductions. Certain other tax breaks also weren't available. All told, more than a quarter of taxpayers used Form 1040A, but that left more than half still having to use the longer Form 1040.
A new alternative
As part of tax reform, the IRS decided to streamline its return using a single form. The new 1040 replaces all three of the previous forms, and the hope is that this simplified version of the old long form will be easier for taxpayers to use.
As early as June, the IRS was touting the prospects for the new form. The 1040 itself will be about half the size of previous 1040s, with the idea that for those who need additional detail in order to substantiate their tax breaks, additional schedules will be available. The hope among policymakers, though, is that most taxpayers would be able to fill in numbers easily without adding any other attachments to the new 1040.
Reaction to the new form will likely end up being mixed. Those who used Form 1040EZ will actually have a slightly longer form to contend with. Meanwhile, those who used the full 1040 in the past will still have to complete numerous schedules, essentially moving much of the information that used to be on the 1040 itself onto supporting documents. Yet in terms of providing a short summary, the new 1040 will offer information that's easier for most people to understand than the old forms did.
Change is always hard, but the IRS hopes that the new form will allow taxpayers to respond to tax reform more easily. For those who end up getting more money back from the government, having to deal with a new form will be worth the effort.
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