Small Business Taxes & Management^TM--Copyright 2021, A/N Group, Inc.

Introduction

The IRS has not released final versions (see the date of this article at the end) of Form 1040, but draft versions including schedules are available. We've included links at the end of this article. Some of the changes are minor such as a change in wording, but not in substance. Many of the changes are the result of the annual cost-of-living adjustments, but some are substantive. Those are the only ones highlighted in the discussion. And keep in mind that many of the line numbers have changed to accommodate dropped and added items. You should also be careful when referencing other schedules.

Form 1040

The first change involves the question regarding virtual (crypto) currency. On the 2020 return the question asks whether you acquired any interest in any virtual currency; for 2021 the emphasis is reversed and put on disposed. The difference can be subtle, but you should read the question carefully.

The charitable contribution deduction for nonitemizers is still there it is no longer a deduction from adjusted gross income, but an addition to your itemized deductions. Finally, it is condensed and not broken out between taxpayer and spouse on the form and the limit is increased to $600 from $300.

The Credit for Qualifying Children and Other Dependents, Form 8812 has doubled in size from one to two pages because the credit has expanded and has become more complex.

The Earned Income Credit has additional lines on page 2 of Form 1040, again reflecting increased complexity of the credit. Line 27 allows a taxpayer younger than 19 to claim the credit and allows the inclusion of nontaxable combat pay and prior year earned income.

Schedule 1

It's going to be hard to ignore the other income category this year. Items such as jury duty pay, prizes and awards, cancellation of debt income, etc. which had no place on the return (tax software companies provided a worksheet that wasn't attached to the return) and combined on line 8. While the additional lines do help, they include only a fraction of the total other income items that should be included as income. As a result, there's still a catch-all at the bottom of line 8.

A similar situation occurred with other adjustments. These were deductions from adjusted gross income (AGI) for items such as jury duty repaid to your employer, deductions from the rental of personal property, etc. A number, but not all, of these items are now detailed out on Schedule 1.

Schedule 2

This is the schedule where you report additional taxes, such as the net investment income tax, household employment taxes, etc. Many of the more frequently encountered taxes were detailed on the 2020 form, but the 2021 version breaks out many more not. Again, tax software companies provided a worksheet that was not included with the return. The revised schedule allows taxpayers to enter many of the additional taxes on designated lines, but, again, provides for a catch-all category at the end.

Schedule 3

This schedule is for reporting nonrefundable credits and other payments and refundable credits. Like Schedule 1 and 2, Schedule 3 has more lines to take into account credits that didn't have separate line items in earlier years. This schedule has also expanded and is now two pages instead of one. The good news is that you can go down the schedule and quickly see if you missed any credits.

Links

Form 1040
Schedule 1
Schedule 2
Schedule 3

Other draft forms can be found at Draft Tax Forms. Enter the form number in the IRS search engine on that page.  

--Last Update 10/28/21