The 2020 Form 1040 makes it official. The never-really-a-postcard individual tax return is dead.
This filing season, set to officially begin on Feb. 12, taxpayers and preparers will see a Form 1040 that looks very much like the two-page version that we tax veterans used to call the long 1040, back when there were three form options.
The most noticeable reworking of the 2020 tax year Form 1040 is its size.
The bigger-is-better trend actually started in just the second year of tax reform, which was what prompted the overhaul of the 1040. Form 1040 has gone from 24 lines in its 2019 incarnation to 38 numbered lines for filing 2020 taxes. There are, in fact even more, as some lines have alphabetic sub-lines.
This year's individual tax return also has some notable additions, a couple of which were created in connection with last year's COVID-19 relief legislation.
Three schedules remain: But one thing — OK, actually three things — remain. Many filers will need to file at least one of the three schedules associated with Form 1040.
These schedules were revised substantially last year when the IRS went from six documents to three. Those three — Schedules 1, 2 and 3 — are back, with a few tweaks, this filing season.
I know most people nowadays use computer software to prepare and file their taxes, so they don't actually look at the forms. But knowing what's on there can help you get ready to file.
So here's an overview of the new and we hope improved Form 1040 and its three schedules that you'll use to report your 2020 income and compute the associated taxes.
And a quick viewing note: You can click on each form image for, in keeping with the 2020 Form 1040 theme, a bigger view of the documents.
Form 1040, getting started: As always, you still enter your personal information, along with that of your spouse and any dependents, either minor children or others whom you support, the same as last year and pre-tax reform.
And again, as always, you must include your, your spouse's and any dependents' names and Social Security numbers here.
A quick note about the standard deduction section at the top of Form 1040. It isn't talking about the actual dollar amounts you can claim based on your filing status. That's in the next section.
Instead, here the form is asking about special filing situations, such as being claimed as a dependent on another taxpayer's return or special physical considerations like age or vision concerns that could increase your standard amount. Those effects will come into play later.
New cryptocurrency question: The most notable change for 2020 is the addition of the checkbox line directly on Form 1040. This used to be on Form 1040's Schedule 1. But some people might not have used that form.
So now, in an effort to more accurately track taxable virtual currency transactions, this question is near the top of Form 1040 itself, just before the just discussed standard deduction segment and warrants another image (below) highlighting the IRS query.
The Form 1040 instructions (pages 15-16) have details on what constitutes a taxable virtual currency transaction. As I've noted in previous posts about cryptocurrency, I'll leave it to all y'all who do dabble in this area to read it yourself and/or talk with your tax adviser about this requirement.
To be honest, being a say-it-with-cash kind of gal, the discussion on virtual currency lost me at hard fork. My mind immediately drifted to plastic vs. stainless steel flatware. But I digress.
The key here is don't ignore this question if you did engage in any transaction involving cryptocurrency during 2020. The IRS is serious about getting its share here.
Show the IRS the money: The second half of Form 1040 page 1 is where the IRS gets down to its main job. Here you tell the federal tax collector how much money you got in 2020 and how you received it.
There are the basic wages, salaries, tips and every popular et cetera on line 1. The following lines down to and through line 15 allow for entries of basic investment distributions, Social Security and private pension benefits, self-employment earnings, capital gains (or losses) and the catchall "other income," such as prizes, contest winnings and lottery jackpots.
You'll note that some of these income items and adjustments are transferred to Form 1040 from other forms and schedules. That includes the still-in-effect qualified business income deduction on line 13.
But at least you get to reduce that gross income to a lower taxable level by taking either the standard deduction or the amount you itemized on Schedule A. The standard deductions, which depend on your filing status and are adjusted each year for inflation, are shown directly on this part of Form 1040.
If you're reading this on your phone and the image is too small to see clearly, those 2020 standard deduction amounts are:
- $12,400 for single or married filing separately taxpayers,
- $18,650 for heads of households, and
- $24,800 for married filing jointly couples.
You'll also note this is where your answers to the standard deduction questions at the top of the form come into play. The form's instructions, or your software or tax pro, will help you calculate what goes here.
New charitable deduction option: The most notable change to this area of Form 1040 is the new line 10b. That's where nonitemizers get a tax break for their philanthropic generosity.
This new deduction is thanks to the Coronavirus, Aid, Relief and Economic Security (CARES) Act, known mostly for the first round of $1,200 per person economic impact payments. CARES also created this special deduction for donors who don't need to file Schedule A.
It's worth a possible $300 deduction for contributions to IRS-qualified charities. But note that the $300 maximum deduction is per return, not based on filing status. So a single taxpayer and a married jointly filing couple get the same.
That changes for 2021 taxes, thanks to the Consolidated Appropriations Act, 2021 (CAA) that was enacted on Dec. 27, 2020. This second COVID-19 relief package doubles the $300 deduction for married couples. However, when you file this year, the $300 is all you and your better half can claim here.
Tallying your tax on page 2 Form 1040: Flipping the Form 1040 also could produce some finger flipping (off). This is where, right from the get-go of page 2 on line 16, you enter the tax you owe on that income you entered on page 1.
If any of your income was from Schedule C or other self-employment endeavors, don't forget about your self-employment tax on line 23. It kicks in when you make more than $600 on your own.
Here's where you'll need your W-2(s) and 1099s to see if any income tax was withheld. Those amounts go on the various sublines of line 25.
Also note that on this new version of Form 1040, any estimated tax payments you made or refund amounts you had applied from your prior year return will go on line 26. These amounts used to be on the 1040's Schedule 3, but now are directly on the return.
Counting credits: The best part of this top half of Form 1040 page 2 is the ability to claim some popular tax credits. Credits are better than deductions because they provide a dollar-for-dollar reduction of any tax you owe.
Refundable credits are the best. True to their name, they could get you a refund if there's any excess once your tax bill is zeroed out.
This year, you can claim if eligible the Earned Income Tax Credit (EITC), additional child tax credit, the American Opportunity educational tax credit and the new Recovery Rebate Credit that's tied to any coronavirus economic impact payments you did or didn't get last year.
This year, due to the financial crisis caused by COVID-19, you have the option in claiming the EITC and/or additional child tax credit of using your 2019 income instead of your 2020 earnings. The choice could get you a larger credit amount.
As for the new RRC, you can read more on claiming it in my post If you don't get your COVID money by Jan. 15, you'll have to claim it on your 2020 tax return. You also might want to check out my item on how offsets for unpaid debts could affect your final RRC amount.
Note, too, that while any COVID-19 economic impact payments (EIPs) you received, either in the first round from the CARES Act or the year-end one via the CAA, are not taxable for federal income tax purposes. The EIPs, however, will reduce your RRC amount.
Refund or tax due details: The final segment of Form 1040 is the same as it's always been, even before tax reform back in 2017 meant changes to the tax document. This is where you figure out if you're getting a refund and if so, how much, or whether you owe Uncle Sam.
If you're getting a refund, congrats! The IRS recommends that you have it directly deposited into a bank account. If you're using tax software or a tax pro, this is the usual refund delivery method.
The main thing here is to make sure you or your tax preparer enter the correct bank account and routing information on lines 35b and 35d. An error here could mean a delay in receiving your refund and a hassle, despite improvements in how the IRS deals with replacing misdirected direct deposits.
Form 1040 schedules: I know, this is a looooong post. But I can't close it out without talking briefly about the three Form 1040 schedules. As noted earlier, some information that goes on your return comes from these related documents:
- Schedule 1, Additional Income and Adjustments to Income
- Schedule 2, Additional Taxes, and
- Schedule 3, Additional Credits and Payments
Some filers won't need any of them. Some will use all three.
Here's a quick look at what goes on which schedules before ending up on Form 1040. You can find more about each in the links above and in the table, as well as the 1040 instructions.
Have additional income, such as unemployment compensation, prize or award money, gambling winnings. One change here is the cryptocurrency question. As noted, this now has been moved to the main Form 1040.
Schedule 1, Part 1
Have any deductions to claim, such as student loan interest deduction, self-employment tax, educator expenses.
Schedule 1, Part 2
Owe AMT or need to make an excess advance premium tax credit repayment.
Schedule 2, Part 1
Owe other taxes, such as self-employment tax, household employment taxes, additional tax on IRAs or other qualified retirement plans and tax-favored accounts.
Schedule 2, Part 2
Can claim a nonrefundable credit other than the child tax credit or the credit for other dependents, such as the foreign tax credit, education credits, or general business credit.
Schedule 3, Part 1
Can claim a refundable credit other than the earned income credit, American opportunity credit, or additional child tax credit, such as the net premium tax credit, health coverage tax credit, or qualified sick and family leave credits from Schedule H or Schedule SE.
Schedule 3, Part 2
Thanks for sticking with me. I know this is a lot, which is why this post is doing triple duty. Not only is it today's regular blog item, it also earns this weekend's By the Numbers honors for Form 1040, and it the latest entry in the ol' blog's Tax Forms Fiesta! page.
Here's to happy and tax-friendly filing of your 2020 tax year Form 1040!