Taxpayers have a month to go before they must have their returns in and are discovering that there's a brand new set of forms to use. Rather than having an extremely long 1040 form that includes a host of information that many taxpayers never have to think about, the new forms move a lot of the detailed information to separate schedules.
Schedule 2 is a short form that includes just a few lines. However, that's a bit misleading, as the calculations that go into the numbers you'll put on those lines are complicated. Below, we'll look at the two key lines on Schedule 2 and what you need to know to fill them out.
Image source: IRS.
Line 45: Alternative minimum tax
The alternative minimum tax (AMT) has been in place for half a century, with the intent of ensuring that all taxpayers pay at least some taxes. The AMT has an entirely separate set of rules that, in many cases, are independent of the regular tax rules. Dealing with it requires taxpayers to prepare what, in essence, is a second set of tax documents to see whether they owe additional tax.
Fortunately, though, recent tax changes have made the AMT much less of a threat starting in the 2018 tax year. That's because the AMT exemption is available to more taxpayers as a result of a big increase in the income thresholds at which the exemption gets phased out.
Under previous law, many upper-middle and high-income taxpayers ended up with no AMT exemption, and that usually left them paying thousands of dollars in extra tax. With the more favorable current phase-out provisions, that happens only for the smaller number of taxpayers who have much higher incomes -- and most of those taxpayers end up paying higher rates of regular tax than the AMT would charge in any event.
Another reason the AMT is taking a smaller bite is that some deductions under the regular tax code have been limited. The most important is the new $10,000 limit on itemized deductions for state and local taxes. The AMT never gave any deduction for these taxes, so even though the new limit in the regular tax laws has drawn a lot of criticism, it had the impact of making the AMT less likely to be an issue for those in high-tax states, as well.
All that adds up to fewer people having to go through the complicated process of filling out Form 6251 to figure out the amount of alternative minimum tax due. Even many of those who used to pay the AMT will find themselves freed of that burden on their 2018 returns.
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Line 46: Excess advance premium tax credit repayment
The other part of Schedule 2 deals with premium tax credits under the Affordable Care Act. Those Americans who meet certain income requirements and meet other eligibility criteria can receive a credit that defrays part of the cost of health insurance premium payments under Obamacare. Taxpayers generally have two ways to claim the premium tax credit: They can claim it in full at the end of the year on their tax return or they can receive the credit in advance.
It's this advance premium tax credit that Line 46 deals with, because in some cases, the amount that gets advanced to you doesn't match up with what you eventually qualify for. The reason is that advance premium payments are based on estimates of what you expect to earn in income for the year. If those estimates are wrong, then you might have too much or too little advanced to you.
Form 8962 goes through all the calculations involved, but in the end, what goes on Line 46 is any amount that you receive in advance payments that exceeds what you were entitled to receive. Essentially, Line 46 forces you to pay the extra credit back to the federal government by increasing your tax liability.
Pay what you owe
Once you've figured the amounts on both of the lines of Schedule 2, you can add them up and then transfer the amount to your main 1040 form. You'll then add that to the regular tax on your income to come up with your total tax bill.
The new tax forms take some getting used to, but in many ways, they simplify what you and your fellow taxpayers have to go through to prepare your returns. Schedule 2 won't be part of a large number of returns, but it'll be important for those select few who do have to use it.
