Don't Mess With Taxes

Millions of filers are still working on 2020 tax returns, some due to extensions, others filing for the first time to get various COVID-19 economic impact payments.

But time, tide and taxes wait for no man or woman. Or the Internal Revenue Service, which has revised the individual Form 1040 and its three schedules for the 2021 tax year.

Form 1040: Aside from the usual year notations, there are some line number reference that have changed in connection with items that are transferred to the 2021 Form 1040 from the form's three schedules. That's no surprise since, as noted a bit later in this post, there have been a few chances to those attachments.

The main change to the 2021 Form 1040 is the wording of the virtual currency question.

This inquiry was moved to the top of Form 1040 for 2020 tax year filings as part of the IRS' effort to make sure that bitcoin et al aficionados are aware of the tax implications of crypto transactions.

On the proposed 2021 form, the question reads, "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" 

That's a slight change from this year's 1040 form, which also asks filers whether they sent virtual currency to anyone. The current precise wording is, "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

There's also a notable change on page 2 of the proposed 2021 Form 1040 where eligible taxpayers can claim the Earned Income Tax Credit (EITC), or as shown on the tax form as EIC for Earned Income Credit.

COVID-relief tax law changes allow 2021 filers to use their earned income for 2019 to calculate the EITC if that prior year's earnings are greater than those in 2021. Since the EITC amount is based, in part, on earned income, more money would produce a larger EITC.

The EITC (or EIC) entries now are broken out as three separate lines: 27a, b or c.

Line 27a wants to know if the taxpayer younger than 19 at the end of the 2021 and satisfies all other EITC claiming requirements. The draft notes that the new 1040's instructions, which have not been released yet, will contain more information.

Line 27b deals with military service members' option to count nontaxable combat pay in their EITC calculations. The 2019 earned income choice is entered on line 27c.

Finally, in the crucial Amount You Owe section on page 2, Form 1040, the 2021 revision adds a line for taxpayers who have hired household, as help and must file Schedule H, as well as for self-employed individuals. The addition says:

Note: Schedule H and Schedule SE filers, line 37 may not represent all of the taxes you owe for 2020. See Schedule 3, line 12e, and its instructions for details.

Folks who hire help around the house as employees, not contractors, must file Schedule H to report those workers' employment taxes if they were paid cash wages and those amounts were subject to Social Security, Medicare, or Federal Unemployment Tax Act taxes. Schedule H also is required if the household employer withheld federal income tax from workers' wages.

Self-employed individuals generally must file Schedule SE if their non-salary earnings exceed $400. This form is the self-employed's way of paying into the Social Security system. The Social Security Administration then used Schedule SE information to figure your future federal retirement program benefits. You can read more in my post Paying self-employment taxes on the revised Schedule SE.

To see more than the clipped form images show above, check out the full check out the full draft 2021 Form 1040 at IRS.gov.

Schedules 1, Additional Income and Adjustments to Income: Schedule 1 is where, per its name, you get to tell the IRS about more of your taxable earnings and/or claim breaks to reduce those amounts.

The schedule's current version on line 8 simply says "Other income. List type and amount" on the dotted line before the dollar amount column.

For 2021, Schedule 1 line 8 has 17 sublines, shown in the excerpt below, detailing the various other income types and sources.

Similarly, Schedule 1's Part II, Adjustments to Income — or as some of us, including me, in the tax community still call it, above-the-line deductions — gets more specific about these potential write-offs.

The current, 2020 tax year Schedule 1 simply instructs the filer, per line 22, "Add lines 10 through 21." What it doesn't say is that you also should check the form's instructions for additional, albeit somewhat more obscure, tax-saving adjustments.

While most filers get help from tax pros or software to bring these to taxpayers' attention, the IRS has decided to get more specific on the 2021 version. It lists those 11 options previously hidden in the instructions (but spelled out in my above-the-line deductions post) on lines 24a through 24k, with line 24z added as the catch-all other adjustments entry spot.

You can see these specific line 24 items and the rest of the changes in the draft Schedule 1.

Schedule 2, Additional Taxes: Here, again as its name indicates, you let Uncle Sam know whether you must pay him more. This could be via the Alternative Minimum Tax (AMT), or other taxes, such as self-employment tax, household employment taxes, additional tax on IRAs.

If you work in an industry where gratuities are common, line 5 on the 2021 draft form has been tweaked to make sure you know you owe Social Security taxes on those tips.

On the current form, it says, to enter unreported Social Security and Medicare tax from either Form 4137 or Form 8919. The 2021 draft says on line 5 for filers to enter "Social Security and Medicare tax on unreported tip income. Attach Form 4137." The Form 8919 entry is moved to line 6.

Schedule 2 also expands to a second page, where in the 2021 draft it, like on Schedule 1, it gets specific. Line 17, Other taxes, now is divided into 17a through 17q, with 17z now the catch-all entry spot for anything not mentioned above.

These include additional tax on such things as Health Savings Account (HSA) and Archer Medical Savings Account (MSA) distributions, excise tax on insider stock compensation from an expatriated corporation, and golden parachutes payments.

Yeah, many of these additional taxes are for very specific and not that common instances. But check out the full draft Schedule 2 just to be sure.

Schedules 3, Additional Credits and Payments: This third Form 1040 attachment is necessary if you need to claim additional credits or make payments not on the main return. Common reasons, for example, to file Schedule 3 would be to claim education or general business credits, or the child and dependent care credit.

Again, like its schedule brethren, Schedule 3 gets specific. Instead of the 2020 nonrefundable credits section line 6 for other credits, the proposed 2021 version spells them out on lines 6a through 6l. They cover, among others, the adoption credit, the credit for the elderly or disabled, and the qualified electric vehicle credit. A.  

On the new page 2, the 2021 Schedule 3 Part II, Other Payments and Refundable Credits, section still has where you enter the amount of due tax you paid when you requested an extension, although it goes from line 9 this year to line 10 next year.

But the other payments or refundable credits line (12 on the 2020 schedule, 13 on the proposed 2021 version) also lists choices as sublines. The draft has new lines 13a through 13h.

You can check out the specifics in the full draft Schedule 3.

Still time to comment: Remember, these are still draft forms. It's likely the IRS will make a few more changes to the 2021 Form 1040 and its three accompanying schedules before issuing a final version.

But it's good to get a preview. That's why this post is being added to the Tax Forms Fiesta! blog page.

And, as the IRS notes in the preface page (excerpted below) to each draft, if you find something in the drafts that you think needs to be revised further, you can let the agency know. Submit comments online to the IRS about draft or final forms, instructions, or publications at IRS.gov/FormsComments.

Because of the volume of comments, not to mention the IRS' other jobs (and backlog 2019/2020 return processing), the agency won't respond to your suggestions. But send them in anyway. It's the only way for the IRS to know what real-life taxpayers and tax pros think of the documents before they are finalized.

You also might find these items of interest:

• Form 1040 goes bigger for 2020 return filings
• IRS adds more tax forms to required e-filing list
• Older taxpayers get their own 1040 form for tax filing

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