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Tax Planning for 2021’s Schedule E of Form 1040

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Tax pro J. Michael Pusey pieces apart what is in the IRS's 2021 Schedule E of Form 1040 in the hopes that tax planners can best share pertinant details with impacted clients.

Aug 3rd 2021
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The IRS’s initial draft of 2021’s Schedule E components are often major elements of tax liability or savings, and often the most complex details of the return. 

The parts consist of rental real estate and royalties, income of partnerships and S corporations, then income of trusts and estates, followed by a section on REMICs (real estate mortgage investment conduits). The fifth and final section sums these parts, also adding a “one-liner” (line 40) for net farm rental income from Form 4835.  

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These are summed and carried to another portion of the return. This is then followed by two reconciliation sections, one dealing with farming and fishing, and the other real estate professionals. There is also the possibility of later drafts. 

IRS policy is that the last of the drafts reflects the final form. Some IRS forms have significant narrative instructions following the text of the form, but that’s not the case with Form E. The total of Schedule E will flow to the 2021 Form 1040 Schedule 1 (Draft of July 21, 2021. Text is found at https://www.irs.gov/pub/irs-dft/f1040s1--dft.pdf).

The 2020 Schedule E came with 12 pages of separate instructions. These aren’t out for the 2021 form as we write in late July. For example, the 2020 instructions tell the beneficiary of an estate or trust to file Form 8082 if reporting differently than the trust or estate return. The same form may need to be filed when there is a similar disparity in the entity return and the flow-through income reported by partners or S corporation shareholders.

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