On Thursday, the House of Representatives passed its tax reform plan. One of the goals that House Speaker Paul Ryan has stated numerous times is that taxpayers should be able to file their returns on a postcard, and he's even gone so far as to produce a 14-line sample of what a postcard tax return might look like under the proposal.
Yet the challenge of tax reform isn't producing a form that fits on a postcard but rather one that people can actually use while still taking full advantage of all the potential tax breaks available to them. There's already a 14-line tax form that millions of taxpayers use, called IRS Form 1040EZ (opens PDF). Unfortunately, only a small fraction of the American public can use that form and claim all the deductions and credits for which they're eligible. Any new form under the current tax reform proposal will inevitably have exceptions, eligibility requirements, and other complications that will make a postcard tax return as difficult to use as the current 1040EZ form is. A closer look at the proposal and Form 1040EZ will help you understand more about what's really at stake.
What the postcard tax return would look like
In his Better Way tax policy paper in 2016, the House Speaker presented a strategy for simplifying taxes that eventually formed the backbone of the current House proposal. The return called for investment income to be taxed at half the rate of ordinary income, allowed certain deductions for retirement contributions, and the election of either a standard deduction or the use of mortgage interest and charitable contribution deductions.
From there, one could come up with a preliminary tax estimate. Then, you'd subtract tax breaks like the earned income tax credit, higher education credits, and the child tax credit to come up with a net tax owed. Compare that to what you've had withheld, and the remainder would tell you whether you'd get a refund or have to write a check to the IRS.
What Form 1040EZ does
The general approach in the Ryan proposal is almost identical to what Form 1040EZ does. On Form 1040EZ, the first four lines of the form take wage income, investment interest, and taxable unemployment benefits or Alaska Permanent Fund dividend payments to come up with adjusted gross income. From there, the form combines a standard deduction and personal exemptions and then subtracts them from adjusted gross income to produce taxable income.
Using that figure, you can calculate tax due from a tax table, and then subtract taxes withheld and the earned income credit. Adding in any individual responsibility payment due under the Affordable Care Act produces total taxes. Take the total and subtract the taxes you've already had withheld, and you'll get a net refund or tax due.
Why don't more people use Form 1040EZ?
Out of more than 150 million returns in 2015, the most recent year for which IRS data is available, fewer than 24 million -- or about one in six -- used Form 1040EZ. The main problem with Form 1040EZ is that there are many restrictions to using it. In particular, you can only use Form 1040EZ if the following are true:
- Your filing status is single or married filing jointly. Heads of household or married separate filers can't use Form 1040EZ.
- You don't claim any dependents. Most families with children can't use Form 1040EZ.
- You don't claim any adjustments to income. That precludes people from taking tax breaks like the IRA contribution deduction, student loan interest, or moving expenses.
- You don't claim any tax credit other than the earned income credit. Again, this leaves out those claiming breaks for children, education, or a host of other provisions.
- You're under age 65 and not blind. Those who are would be eligible for higher standard deductions, but Form 1040EZ isn't sophisticated enough to handle that.
- Taxable income is less than $100,000.
- You don't have any types of income other than those covered above, and taxable interest must be $1,500 at most.
In addition, you can't have household employees for which you have to pay employment taxes, you're not a bankruptcy debtor, and you can't have gotten advance payments of the premium tax credit under the Affordable Care Act. Anyone who doesn't fit all of these qualifications has to use either Form 1040A or the most complex full Form 1040.
Don't expect a postcard return
Despite extensive changes to tax laws under the proposed reform bill, most taxpayers will find their situations to be too complicated to use a return like Form 1040EZ or the Ryan postcard return. At best, a postcard will also require multiple supporting schedules with the calculations necessary to come up with the numbers to go on a summary return. Unless there are substantial further changes before a final tax package becomes law, taxpayers shouldn't expect their tax preparation to get a whole lot simpler.