New law and IRS guidelines answer some questions about unemployment benefits, but create many … [+]
President Biden signed the American rescue plan on Thursday, March 11, 2021. The law provides $ 1.9 trillion in tax and financial relief for businesses and individuals, and includes a provision that exempts a taxpayer’s first $ 10,200 of Unemployment Benefit (UC) from tax at the federal level. Many taxpayers who have waited to see if this provision was included in the final law can now file their tax returns, but some may want to keep waiting.
The IRS issued guidance on how to consider the new law for an individual 1040 on Friday March 12th. The adjustments can be made manually. However, it’s probably best to wait before submitting – at least until the software vendors have had a chance to roll it out and test the change and propagate it to users. The new law may change the Adjusted Gross Income (AGI), which is used for calculations and thresholds for many items on a tax return, not just tax. Manual adjustment can lead to some benefits being overlooked. Taxpayers who use software to create their own tax returns should remember to ensure the required update is installed and recalculate their tax returns before filing them electronically.
Another reason to wait for filing is that it remains unclear how many states will follow the new federal law. Many states are in dire need of tax revenue and may choose not to exempt those first $ 10,200 from state income tax. If you live in a state with no state income tax, filing your individual 1040 is likely safe. If your state is taxing income, it is best to wait for your state to issue guidelines on whether or not to follow federal law. If you are filing a joint tax return with your spouse, read on, even in a state where there is no state income tax. Taxpayers whose combined AGI exceeds $ 150,000 may need to consider whether filing separately this year is a better option.
Married taxpayers who have received unemployment but whose joint AGI exceeds $ 150,000 should consult their tax advisor to determine if filing separately will produce a better tax return than filing a joint tax return. Up to $ 10,200 UC per spouse is exempt from federal income tax under the new law. Once the AGI for a return exceeds $ 150,000, all UC will be taxable. Filing separately could help one or both married taxpayers get around this cliff. Even so, filing separately may not be the best answer, depending on different tax credits, whether or not taxpayers live in a communally owned state, and a variety of other factors. When working with a tax professional, be aware that preparing a comprehensive analysis of the marriage separately takes time and effort. Many tax professionals calculate for both the analysis and the second rate of return. Additionally, your tax advisor may request (or insist) that you apply for an automatic renewal to give them the time necessary to fully analyze the benefits and costs of filing separately. The tax benefits of non-taxable unemployment can range from $ 1,000 to $ 2,000, but the tax cost of losing, say, educational credits can also be thousands of dollars. In general, it is worth both the additional cost and the additional time it takes to have your trusted tax advisor do the analysis and make a recommendation based on your specific facts and circumstances.
An important aspect of tax law that taxpayers should not overlook is that taxpayers cannot separately amend a jointly filed tax return. Tom Gorczynski, owner of a registered agent at Gorczynski & Associates, a tax preparation and planning firm in Phoenix, Arizona, notes that married taxpayers who have already filed a joint tax return can still get relief if they can do so before the filing deadline on Jan. Submit a replacement tax return April. The mechanisms for filing a replacement return are well beyond the scope of this article. However, a replacement return is an option to undo a jointly submitted return if you act quickly.
This upcoming deadline for filing replacement returns is another reason why taxpayers who have not yet filed a filing should be willing to file an extension if they would like their tax advisor to evaluate the potential benefits of filing separately. Many tax professionals are currently working on replacing tax returns for clients whose joint tax return has already been filed. Replacing returns for clients who need them will take precedence over undelivered returns in the short term. And if you are concerned that filing for an extension will increase your risk of an exam, this is a common tax myth, but just a myth.
You may be thinking, “I don’t want to wait. Can’t I submit now and change later? “Yes, aside from changing a shared return that can be filed separately (which is not allowed), you can file it now and change it up to three years later to request an additional refund. If you’re expecting a large federal refund, that was enlarged by this change and you need that money now, your best option may be to file it now and change it later.
Note, however, that modified returns can now be submitted electronically (if the original return was submitted electronically). However, they are often hand-processed and it can take a few months or more to receive your additional refund. The IRS is catching up on processing the 2019 paper returns but is lagging behind with other correspondence and has now been tasked with distributing the third round of economic impact payments. It will be working on prepayments for child tax credit shortly. If you’re planning on filing a modified return, wait for your money.
If you hire a tax advisor, be aware that most tax advisors charge fees for preparing and filing amended tax returns and may not be able to work on your amended tax return until the April 15th filing deadline. It is currently unclear whether filing an amended declaration is even required to take advantage of the new law. It is still possible for the IRS to implement software changes later this year that will make the adjustments and automatically issue notifications and refunds. In this case, it is still a good idea for taxpayers to review all IRS communications they receive from a tax professional to ensure that they are correct and that other beneficial changes to the reduced AGI have not been overlooked.