BRAZIL – 2020/10/09: In this photo illustration the Internal Revenue Service (IRS) logo seen … [+]
Every once in the while the IRS comes out with something that may cause beleaguered tax preparers to breathe a sigh of relief. This just in, which is short enough to reproduce in full.
IRS Statement – American Rescue Plan Act of 2021
The IRS is reviewing implementation plans for the newly enacted American Rescue Plan Act of 2021. Additional information about a new round of Economic Impact Payments, the expanded Child Tax Credit, including advance payments of the Child Tax Credit, and other tax provisions will be made available as soon as possible on IRS.gov. The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time.
The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable. For those who haven’t filed yet, the IRS will provide a worksheet for paper filers and work with software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return. For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance. (Emphasis added)
Worst Tax Season Ever !
I have made it official with one of my unscientific polls that 2021 is the worst tax season ever.
Why 1988, you youngsters may ask? That was the tax season that we had to deal with phase-in of the Tax Reform Act of 1986, which included, inter alia, Code Section 469, the oxymoronic passive activity loss rules among other far reaching changes. Also if I remember rightly S corporations were being nudged into adopting calendar years and repeal of the General Utilities had triggered a flurry of S elections in 1987.
First The Paycheck Protection Change
Right in the middle of this tax season the Paycheck Protection Program rules were changed to allow sole proprietors to borrow based on their gross rather than their net. There was a special window where the little people were supposed to have exclusive access, but as far as I can tell the banks were not able to reprogram their application processes that quickly. I managed to experience all this angst just from helping out a friend. The pressure on somebody with scores or hundreds of people affected by that one change must have been enormous.
Then The Unemployment
And then there is the really nice thing that favorably affected a lot of people. The Rescue Plan indicated that up to $10,200 of unemployment insurance could be tax-free in 2020. There is this unusual cliff effect. The rule only applies if AGI is less than $150,000. It is not phased out from there, it just disappears. So if your AGI is $160,000 and you collected some unemployment, making your 401(k) a ROTH seems like it was an even worse idea than I would have told you I thought it was. I should note that my general view on ROTH may be a minority opinion.
Regardless, it’s a wonderful thing for a lot of people. But for the preparers who rushed to get returns filed maybe not so much if now an amendment is going to be required. What was the rush? That would have come from the stimulus payments. The next round of stimulus payments will be based on either your 2019 or your 2020 return if the IRS has already processed it. Someone close to me who maintains a family and friends micro-practice went over a situation with me. New kid in 2020 and just married. New spouse had issues and did not have 2019 return in. Never mind why.
It was pretty clear they should rush out that 2020 return particularly since 2021 looks much brighter economically. As it turns out new spouse also received unemployment. The announcement from the IRS on holding off on amending is a big relief. I would think that for someone with scores of situations like that it is an enormous relief.
Are Things Looking Up?
My money is that they will program things to make the adjustment automatically. They can likely do that more easily than processing many thousands of amended returns. We’ll see.
There is one mystery about my poll results and that would be the 25% who think 2021 is not as bad as 2020, It would be interesting to hear from them.
I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals. My ideology can