I have been meaning to write an “Advanced White Coat Investor” book, specifically focused on tax reduction. I put it off in 2017 when they started doing tax reform and still haven't really gotten around to it. I thought maybe if I did a few more posts than usual on tax stuff in 2019 that maybe by the end of the year I'd be ready to write the book. This seems like as good a place as any to start.
For 2018, the 1040 has been made into a postcard. That makes for a great political sound bite, but what really happened was that the 1040 was split into seven pieces. Unlike Voldemort and his horcruxes, that's not necessarily a bad thing. While you are likely to have to do more than one of those pieces, you probably will not have to do all seven. Let me show you what I mean.
As you can see, it's all still there, it's just split across 7 different forms. But there is a good chance you won't have to fill out all seven forms. Even on my relatively complicated tax return, I'll just have to do the 1040 and Schedules 1, 3, 4, and 5.
The New 1040 Form
Enough with the old 1040 though, let's move on to the new one. There is no more 1040EZ or 1040A. Just 1040. Here's the first page.
Pretty straight forward, right? Names, social security numbers, your dependents, your health insurance coverage, and signatures. That's it. Here's page two, the back of the postcard:
Here's where all the good stuff is. The first 7 lines are all about income. If all you have is a job, you'll just fill out lines 1, 6, and 7. If your life is more interesting, you'll be filling out most of those lines plus Schedule 1.
Schedule 1
Let's talk for a minute about Schedule 1, shall we? Here it is:
This all used to be on page 1 of the 1040, so it should look pretty familiar. I like how they “reserved” a few lines for later use. That's thinking ahead. Now when they change the tax code, all of the line numbers won't change. At any rate, line 10 is any tax refunds you received. Line 11 is your alimony. Alimony used to be taxable income to the recipient and a deduction to the payer. That's still true for 2018. In 2019, at least for divorces finalized after the end of 2018, alimony will no longer be a deduction for the payer nor taxable income to the recipient. Since the payer usually has a higher income than the recipient, that means that the government is now penalizing divorce, as if divorced people weren't being financially penalized enough already.
Line 12 is where your sole proprietor income moves from Schedule C to the 1040. Line 13 is where your taxable account capital gains and losses move from Schedule D to the 1040. Line 17 is where your real estate income, your K-1s, and your trust income shows up on the 1040. Farm income, unemployment, and Alaska Permanent Fund dividends go on lines 18, 19, and 21.
Lines 23-33 are all your above the line deductions. This includes your HSA contributions, self-employment tax deduction, individual 401(k) contributions, self-employed health insurance deduction, alimony paid (for agreements prior to 2019). There is also a line for an IRA deduction and student loan interest deduction, neither of which most attendings will be able to take.
Let's go back to the second page of the 1040.
Back to the 1040
Line 8 is all about your deductions. Most people, although not necessarily most of my readers, will be putting the standard deduction on this line. Everybody else will still itemize on Schedule A. Of course, a lot of stuff that used to be on Schedule A is no longer a deduction. That's probably worth a quick look. Let's go over there.
It still starts with medical expenses, but with a floor of 7.5% of Adjusted Gross Income (AGI), most docs aren't going to be able to take that. 7.5% of AGI is usually more than your insurance out of pocket maximum.
The next section is your SALT tax deduction. This used to be a big deduction, especially for doctors in high tax states with high property taxes, like those in the Northeast. Now it is limited to just $10,000. Most docs will hit that between their property and income taxes. If you're in an income tax free state, you can still use your sales taxes instead of your income taxes, but for most docs the income taxes will be much higher.
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Next is where you deduct your mortgage and margin interest. Note that for a new mortgage only the interest on a mortgage of $750,000 ($375,000 Married Filing Separately) or less is deductible, down from $1M ($500K MFS) in 2017. Interest on a HELOC is now deductible to the same limits but only if used to improve the home. There is no deduction on up to $100K not used to improve the home like previously. Using your home equity as a source of real estate investing money or to buy a boat does not produce a deduction.
Next is charitable deductions. No new limitation there, but if you're a super-giver note that you can only deduct a contribution of 60% (30% if it is “capital gain property” likes stocks or mutual funds”) or less of your AGI to most organizations. I used to laugh at that limit, but now that we give more than we spend each year, it could become a problem for us at some point. Imagine someone that is very wealthy and then has their income go down as they retire. The IRS doesn't care if you have $20M. If your AGI is $100K, only $60K of contributions are deductible.
Let's go back to the 1040.
Back to the 1040
Line 9 is where the new fancy qualified business income (also called the pass-thru deduction or the 199A deduction) fits in. This one deserves its own blog post, so let's skip it for now.
Line 10 is your taxable income, that's what is actually put into the tax brackets/tax tables to get your tax bill. Line 11 is where you pay tax for your minor children if you don't want to do a return for them. That's also where the AMT tax flows in from Schedule 2. Schedule 2 doesn't look like much, here it is:
Yup, that's the whole thing. Lots of docs are still going to owe AMT. If you do, you'll need to fill out both Schedule 2 and Form 6251 like previously. Who are we trying to kid though? The computer will take care of it.
Line 12 is interesting. That's where you get your child tax credit. I still don't get this one, but many docs that didn't use to get it now will. It's $2,000 per qualifying kid, $1,400 of which will be refundable. The real change is the phaseout is much higher than it used to be. It begins at an AGI of $200,000 ($400,000 Married Filing Jointly.) Many doctors will still get that. With the new higher standard deduction instead of a lower deduction plus exemptions that doctors were often phased out at, this is a win for many. Schedule 3 also plugs in on this line.
Schedule 3
What's on Schedule 3? Let's take a look.
The only thing I'm going to have on this schedule is the foreign tax credit from the Total International Stock Market Fund I hold in my taxable account. But lots of docs are going to get the child care expenses credit on line 49. If you have kids in college, line 50 is where you get the credit for paying their tuition. Residents might be able to get the retirement savings contribution credit, but it phases out way below most attending incomes. It is completely gone at an AGI of $32,000 ($64,000 married.) Remember the contribution could actually lower your AGI enough to qualify for the credit! Roth contributions are still probably the right move for most residents, but it might be worth running the numbers here if a tax-deferred contribution could increase your credit significantly, especially if you're also trying to keep your IDR payments down. If you did home improvements in 2018, take a look at the residential energy credit reported on line 53.
Schedule 4
Looking back at the 2nd page of the 1040, we see that Schedule 4 flows into the 1040 on line 14. This one will affect lots of docs. Let's take a look.
That pesky self-employment tax shows up on line 57. If you screwed up your retirement, education, or health savings account contributions (or withdrew money you should not have), you pay that tax on line 59. Line 60 is where Schedule H flows in for all of you with nannies. 61 is where you pay the penalty for not buying health insurance. Yes, that has been repealed, but only starting in 2019. Line 62 is where you report your PPACA (Obamacare taxes). I was hoping those would go with tax reform, but alas, they're here to stay. If you make more than $200,000 ($250,000 MFJ) you will be paying these. Line 63 relates to foreign income that wasn't fully taxed. Let's go back to the 1040.
Back to the 1040
On line 15, you add up all your tax. On line 16, you add up all the tax that your employer withheld. Schedule 5 flows into Line 17.
The main thing here that is going to affect docs is line 66. This is where self-employed docs report what they paid in quarterly estimated tax payments and in their request for an extension to file (line 71).
On the 1040 again, lines 18-23 are pretty self-explanatory and unchanged from the prior edition. You only have to fill out Schedule 6 if you live overseas or want to allow your tax preparer or someone else to discuss your return with the IRS. It looks like this.
Schedule 6
So much for our tour of the new 1040. It was really just a process of moving things around a bit. The big changes in the tax code were not the changes on the tax form, but the changes to the brackets and the deductions that have been discussed before. For most of us, this resulted in a lowering of our overall tax bill, but there were a few for whom the decrease in the SALT deduction outweighed the effect of the lower tax brackets. If you are in a high tax state, the only way to know if you came out ahead or behind is to run the numbers yourself.
What do you think? Do you like the new format for the 1040? Did they make it simpler or more complicated? How many of the schedules will you have to fill out? Comment below!
Tax stuff can make my head spin sometimes!
I do wonder about your comment on the AMT.
Based on my reading, I think a lot of doctors will NOT have to pay that anymore. Most doctors used to get phased out of the AMT Exemption (i.e. “deduction” for AMT) based on their income being too high with the prior tax law.
Given that you can now take the exemption of $111,700 (married; $71,700 if single) and subtract this from your AMT income if you make less than $1,020,000 (married; $510, 300 if single), I bet a lot of doctors are going to find that they end up paying under the brackets and not the AMT unless they earn more than these numbers.
I actually wrote a post about these changes last week. I’d be curious to know why you think a lot of doctors will still be paying the AMT given the big changes that happened with the new tax bill to the AMT exemption and phase out.
TPP
Thank you! I really needed this.
Most doctors paid less tax in 2018, but the changes were confusing- especially for those of us who were used to the old ones.
My goal was to get below $315k to allow a low bracket and the child tax credit. It went up to $321 for 2019. I didn’t make the goal but will try again.
I’m looking forward to the 199A post -and the book if that materializes.
Nice review! Some of our colleagues may still get the American Opportunity tax credit (MAGI phase out 160-180k) and less likely the Lifetime Learning credit (113-134k) if they have kids in college (or for themselves or spouse for the Lifetime Learning credit).
Yes, that’s true. $100-200K is a tricky income range. Lots of moving parts there.
You scared me for a second with the HELOC deduction limits, especially because I’m using one for a renovation and if the limit really is $100k then TurboTax completely missed it.
Went back to the IRS clarification post:
https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
HELOC interest is deductible with the same limits as a mortgage as long as it’s used to build or improve the home that secures the loan.
Looks like you’re right. Will correct.
A couple reasons why far fewer taxpayers will be in AMT:
1. The AMT exemption has been increased.
2. The AMT exemption phase-out has been increased.
3. Personal exemptions, which used to be deductible for regular tax, but not for AMT, are gone.
4. State and local taxes, which are deductible for regular tax, but not for AMT, are limited to $10,000.
Regarding the trick of cutting the old 1040 into 7 pieces, that has made things more complicated. You will note that if you have deductions on lines 23-33 of Schedule 1 that the total of those deductions does not carry to Form 1040. Rather, it is simply subtracted from Form 1040 line 6 to get to Form 1040 Line 7. Thus, the Form 1040 is no longer a straight math exercise of adding and subtracting what you see (at least on page 1 of the old form.) I think this increases the likelihood that some taxpayers will forget to take those above the line deductions, since they don’t show up on Form 1040. You lose, the IRS wins.
I have to gag when I hear the phrase “tax simplification.” There is little that is simpler about the new tax law.
I suppose it probably will be fewer docs that will owe AMT, but I think a lot of them still will owe it.
I don’t think the line 6-7 issue is a big deal, but I agree with the point that splitting the 1040 into 7 horcruxes isn’t simplification.
Great summary Jim. Best I have read anywhere.
Took longer to do our return this year simply because I had to learn where all the stuff was now kept. I guess it will be fine in the future, but really seemed just like windowdressing to me.
There were substantial changes to the tax code, but there was an awful lot of windowdressing to make the 1040 “postcard-size”.
Thanks WCI! Great summary.
Interns should utilize the non-refundable lifetime learning credit of up to $2K on Sch 3 since they most likely had Spring tuition expense.
Thanks again for the post.
Although lots of them paid it in December 2017, so it would go on the prior year’s taxes, when there wasn’t any income.
As far as the AMT… I think the new law will release many high income families from the AMT, predominantly from the high SALT tax states.
My state/local and real estate tax deduction of 134 last year (81/53) got added back into my income for the AMT math… ending up with a 23K additional payment. So effectively I couldnt use those taxes as a deduction at all.
With similar income this year, that extra AMT payment is gone. “Unfortunately” my tax burden will be higher due to increased outside income (good problem to have),
I agree–fewer will pay AMT.
I file my taxes using tax a software and didn’t notice the difference. I’d recommend to anyone doing his own taxes to use one. Not only does it assure accuracy it helps one learn about the tax code. I’ll admit I’m a bit odd in this respect, but I like doing it. To me it’s like a computer game w/ a real payout (or penalty).
A good overview of the new 1040 and its relation to the old version. If I recollect the charitable contribution limit increased to 60%, from 50%, with the passage of the TCJA. The appreciated capitol assets limit remained 30%. To maximize the charitable deduction from giving an appreciated capitol asset, it should have a longterm capitol gain, otherwise the gift is valued at the basis cost, not the appreciated value. Also of note, if you exceed the limits, you can carry over excess donation amounts into future tax years, generally limited to five years, except for a qualified conservation contribution, which is allowed out to 15 years.
Thanks for the correction. I love blogging to a large audience. When you screw up you are quickly corrected and can fix it before most people notice.
I would love for you to write a book specifically on the tax code. The difficulty is not collecting and understanding all the information (we studied much harder things in medicine) In my opinion the difficulty is writing it in a way that is enjoyable to read. Also if you make it specific enough to be helpful I would be afraid that it would out date it self quickly. I wonder if it would be better as a blog mini series that you can update easier?
Either way I look forward to reading it!
The problems with a continually updated blog mini series is it is trickier to monetize well enough to justify the creation and updates and it is spread all over the place.
I agree it is challenging to write something readable on this incredibly boring topic.
Good point.
I guess that is why books have multiple editions!
Which is my theory as to why they change the recommendations for CPR every 2 years. I always preferred 15/2.
The true best ratio for the first 5 minutes after cardiac arrest is 500/0 unfortunately. The science is pretty clear.
It would be interesting to see once most people file, how many people really are still paying AMT.
In the past, with a taxable income in the $350-400k range, we’ve paid $4-5k in AMT. We’re in a high-tax state (IL).
I haven’t completed our taxes this year as we’re waiting on a K1, but with most of the information in hand, I’ve put everything into Turbotax. We won’t be paying AMT 🙂 Also, with the lower tax rates, and as we’re also not subject to PEP and Pease, our federal taxes are less this year by a good amount.
So, for us, the $10,000 SALT limit is a non-issue, since that deduction was limited for us in the past.
Indeed. So its seems that the 10,000 SALT restriction may NOT impact the 500K+ salaried 1%ers in high tax states… but instead snares the 150-250 K folks, who never were trapped by the AMT.
Here in New York, in that salary range , suburban houses may have Real Estate taxes of 15, 20, even 25 K for modest homes in good school district. Along with the local taxes, the loss of 10-30k in deductibility will have a very large impact on monthly cash flow… and ultimately may reduce the value of homes (double whammy). I know from personal experience, back in the day when we bought our first place (early 90’s), the deductibility of these taxes figured into the amount we felt we could afford to pay.
I’m amazed that buying a home ever works out better than renting when property taxes are $25K. How can that be affordable for anyone?
NYC is a crazy place. One huge trade-off is schools. The quality of public schools is very uneven, with only a few really good options. Which can drive up prices in particular neighborhoods. And now our progressive mayor is trying his best to break up those school districts under the banner of fairness.
So this frequently leaves private schools as a major option…. now about 40-50K per year…per kid!!! So even one kid at 40K makes a suburban real estate tax of 25K a ‘bargain’. In addition to saving the 4% NYC income tax. Like I said… crazy. Luckily, when I went this route, I had the luck of being a beneficiary of my specialties ‘golden era’ (1992-2002 radiology). No such luck for NYC junior rads today.
You may want to clarify the mortgage interest deduction section by stating that people who took out a loan before Dec. 16, 2017 can still deduct the interest on principal up to $1 million.
You are correct.
I came out ~$9k less on the AMT this year, after getting hit with it the last 3 years. A shame it isn’t truly an alternative “minimum.”
Just wanted to thank you for such a clear, description of the 1040.
Thanks again WCI for a great post!
Regarding my earlier comment (and your followup comment) about the nonrefundable $2K lifetime learning credit for interns, I have taken the credit for both of my daughters their intern years. They did not receive a 1098-T in the tax year they graduated medical school, but used prior year 1098-T for tuition billed for Spring. There is a place on form 8863 (which feeds to Sch 3) to note the year of 1098-T issued. The Spring tuition expense was then deducted from their federal loans in January of the tax year as shown by their online student account. It takes a little investigation, but worth the $2K tax credit to an intern. Also, interns should deduct interest deemed paid upon consolidating their loans. Even if no “out of pocket interest” was paid in the tax year, they should have a 1098-E from the loan servicer prior to consolidating showing the interest “paid” which was actually interest rolled into loan principal upon consolidation. On another topic, if a medical student has any regular IRAs from prior work experience, could convert to a ROTH during medical school and utilize the lifetime learning credit, paying no tax on conversion . Just calculate how much to convert each year so you have no taxable income after the lifetime learning credit.
Interesting. Cool trick.
To correct my last post on the IRA conversation to ROTH as a medical student with no income, will have “taxable income” from the conversion, but should have no federal tax liability if taxable income is $2K or less and uses the Lifetime learning credit to net to zero federal tax due. Depending on the state, may have state tax on the conversion.
Thanks again WCI for the post !
Don’t forget the standard deduction either.
Yes, to find out the conversion amount BEFORE you convert to a ROTH and pay no federal tax, would have to do a calculation with the standard deduction and any other income/deductions the student would have that tax year. We just converted my daughter’s IRA balance over two tax years.
Started a non deductible IRA for 2018, then converting it to Roth IRA ( for the backdoor Roth). On this new 1040 2018 tax form do we put the $5500 on 4a and then put $0 on the 4b? or do we just keep the 4a blank? This is after we file the 8606 . The form 8606 stated that we fill out the 1040 4b but did not mention 4a.
Thank you WCI.
No, that all goes on Form 8606. Lines 4a/b are for distributions. You’re not taking distributions.
1.) Any idea if this (listing on Line 4a/b) would apply to the rollover of a 401a DCP (mandatory 7.5% contributions of pre-tax income) from residency into a Roth IRA on separation? My accountant has that listed as Line 4b, but they also listed my backdoor roth on Line 4a and thanks to this I see that’s wrong. Reviewing the 8606 for my backdoor roth I see the accountant listed the $5500 on line 7 instead of line 8, which I see in your tutorial is wrong, so I am less confident in this other decision as well.
2.) Point of clarification, for backdoor roth, the 1040 Line 4b would include any taxable income that was generated from gains on the principle in the traditional account prior to conversion? (ideally you wouldn’t have any, but if you did). That is what I gather from line 15c of the 2018 form 8606 “Taxable amount. Subtract line 15b from line 15a. If more than zero, also include this amount on 2018 Form 1040, line 4b”
Thanks for this site and the wealth of knowledge here! I’d be quite lost without it.
1. Dunno, but probably. It’s definitely a taxable event so you’ll have to pay taxes on the conversion.
2. Sounds right.
Hey Jim, I think your idea about a book focused on doctors’ tax scenarios/nightmares/planning is a great idea. We get crushed by the IRS as a profession and some more focus on the smartest tax strategies would be great. I’ve thought s lot about this as well and it might be fun to discuss over dinner or a mountain bike ride…
Maybe I can talk you into writing it so I don’t have to. 🙂
Regarding schedule 1, I have some confusion about whether I should use line 12 or 17. I get a K1 from my large group, but technically they consider me a “sole proprietor” partner, the other option being an incorporated partner. To me it kind of seems like it could go either way, and looking at the IRS online instruction publication didn’t seem to offer much clarification. In your post I see “Line 12 is where your sole proprietor income moves from Schedule C to the 1040. Line 13 is where your taxable account capital gains and losses move from Schedule D to the 1040. Line 17 is where your real estate income, your K-1s, and your trust income shows up on the 1040.” Any idea which line would be more appropriate?
17. K-1s come from partnerships. If you got a 1099 you’d use 12. They’re misusing terminology. You as an individual are a partner. Some of your partners are corporations and some are individuals. None are “sole proprietors.”