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July 1, 2018

IRS To Release a New 1040 Form

The familiar 1040 tax form is getting a big makeover. Treasury secretary Steven Mnuchin said that the Internal Revenue Service (IRS) will release a new Form 1040 this week: “It will be a postcard as we’ve promised.” As of early this afternoon, nothing about it had been posted yet on the IRS website, but The New York Times published images of the draft versions yesterday.

The new form is shortened considerably. The Wall Street Journal counts 56 lines as being removed. Form 1040 will now be one page instead of two pages. There

is also a blank space in the middle, which I presume exists so that you could fold the form in half to mail it. Doing so would make Form 1040 close enough for Mnuchin to claim his postcard description is true, even though a folded 8” x 11” sheet of paper is still bigger than a postcard. As a reference point, the U.S. Postal Service says that in order to qualify for the postcard price, a mailpiece must be “no more than 4-1/4 inches high x 6 inches long x 0.016 inches thick.”

Describing the form as “postcard-sized” makes for good symbolism from a tax reform standpoint, but for most taxpayers the physical size doesn’t matter much. IRS statistics show that close to 90% of individual taxpayers filed electronically in 2016 and a similar percentage is projected to have done so in 2017.

What matters for most taxpayers—beyond what they’re paying to the government—is how simple or hard it is to figure out how much they owe or are due. The revised Form 1040 will force many taxpayers to complete more forms. Capital gains, penalties on early withdrawals of retirement savings, IRA deductions and student loan deductions go on a different form. If you’re subject to the alternative minimum tax (AMT), that’s another form. Qualify for the retirement savings credit? Yup, fill out another form. The six new forms are in addition to Schedule D (capital gains and losses), Form 6251 (AMT), Form 8880 (credit for qualified retirement savings) and other forms you may already be filling out.

The extent to which you will notice the complexity depends on how you are completing your taxes. Those of you who file by hand will definitely notice the difference. Users of TurboTax and similar software-based programs may not notice the change as long as they stay within the programs’ primary interface. I can’t comment on how noticeable the change will be with the various online offerings because I’m a long-time TurboTax user, but I suspect that the experience will be similar. The change will be very noticeable by those of you who, like me, go through their tax return by hand to ensure there aren’t any mistakes or unintended errors, or need to use the view forms’ functionality in tax software or web-based platforms.

Speaking of taxes, now is a good time to review your tax situation and begin to take any actions you were planning to take. Since we’re halfway through the year, you should have an idea of how your income and expenses are trending relative to expectations. For instance, if you’ve already incurred larger-than-expected medical expenses, you might want to make sure you incur other related expenses (e.g., new glasses, dental work, etc.) this year instead of next. Alternatively, those of you who are still working may want to review your retirement savings contributions. If the tax cuts have increased the amount of aftertax income you receive, consider shifting some of the savings into your retirement savings accounts [e.g., 401(k), traditional IRA, Roth IRA, etc.] and/or health savings account.

You may also want to start acting on any planned account-related activity. For instance, if you were intending to use the lower tax rates to do a Roth IRA conversion this calendar year, start the paperwork. You can always open the account now and gradually make the conversions over the second half of the year by converting the same dollar amount each month. Alternatively, if you think that the stock market will incur more downside volatility before the end of the year (and there’s no guarantee that it will), setting up the account now will give you the chance to act quickly should the opportunity arise to take advantage of the reduced prices. (Lower prices reduce the tax cost of the conversion or allow you to convert more shares for the same dollar amount.) If you do opt for attempting the more tactical approach, just be sure to set up a reminder to complete the intended Roth conversion before the end of the calendar year.

The Week Ahead

The U.S. equity markets will close early on Tuesday (1:00 p.m. Eastern Time). The U.S. financial markets will be closed on Wednesday in observance of Independence Day. On behalf of everyone at AAII, have a happy July 4th with, hopefully, good weather. No S&P 500 index companies are scheduled to report. On the economic front, Monday will feature the June Purchasing Managers’ Manufacturing Index (PMI), the June Institute for Supply Management (ISM) manufacturing index and May construction spending. May factory orders and June vehicle sales will be released on Tuesday. Thursday will feature the June ADP employment report (a day later than usual), the June ISM non-manufacturing index and the minutes from the June Federal Open Market Committee meeting. June employment data—including the change in nonfarm payrolls and the unemployment rate—and May international trade data will be released on Friday.

Courtesy of Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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