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.
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.
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.
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.
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.
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!