It’s TaxQuips time from TaxMama.com® – today TaxMama® wants to give you some strategies or recommendations about how to deal with the retroactive changes from the American Rescue Act.
Dear Family,
When Congress passed the American Rescue Act, they included some tax provisions that affected tax returns that had already been filed by millions of people. At the time, there was a great deal of confusion on what to do for those who had already filed; and how to handle these benefits for those who had not yet filed.
- Making $10,200 of 2020 unemployment income tax-free
- Waiving the 2020 repayment penalty/tax for those with Marketplace insurance coverage, whose incomes rose dramatically due to IRA and retirement plan distributions, additional unemployment benefits, etc.
What should you do?
The IRS says, about both of these retroactive provisions to DO NOTHING.
They have started to issue refunds to anyone who has already filed tax returns.
These changes may affect many other areas of the tax return when adjusted gross income drops and tax liability drops.
Is that a good idea – to just sit and wait?
Actually yes.
Wait for the IRS to finish processing all those refunds, since they are going to be doing this anyway. Give them a couple of months for their computers to spew out their version of the recalculations on these retroactive revisions.
THEN…consider amending. Why?
The unemployment issue: There are a few considerations that might increase the refund, beyond what the IRS sent to you.
a) Married couples, living in community property states who filed jointly are entitled to take 2 of those $10,200 reductions (up to the amount of total unemployment benefits received), even if only one of them received the unemployment income.
Again, why? Because in a community property state, each person owns one-half of all the income of the other spouse. This is one of those times when this rule really works in favor of the couple.
- b) The law limits this $10,200 tax-free benefit to tax returns with less than $150,000 of adjusted gross income. So couples whose joint income was higher than that? No refund being issued. BUT, if the couple filed an extension (even after filing their tax return), they are now permitted to file a set of “superseded returns,” where each person files as married filing separately. This way, perhaps one or both spouses can bring their incomes below the $150,000 threshold to qualify to exclude the $10,200.
Oh…you know that you cannot go from MFJ to MFS? That’s very true. The only way to do that is by filing a superseded return. A superseded return totally replaces the original tax return as if it had never been filed at all. (But it will take a long time to process and to replace the original return, since it has to be filed on paper.) The superseded return must be filed by the due date (including extensions) of that year’s tax return. That’s why this will only work for someone who put their return on extension, even after filing.
The Excess Premium Tax Credit that doesn’t need to be repaid: Many taxpayers filed tax returns showing this balance due on their Schedule 2, line 2. If they paid the tax, the IRS is sending them refunds. If they didn’t pay the tax, but this is the only reason they have a balance due, the IRS is sending them letters reversing that balance due.
Does filing an amended return change any of this? Not really. Since the penalty (or fee) is being waived entirely, it makes no difference how low you bring your adjusted gross income. Or does it?
Yes, it does. Because when you file your superseded return to adjust for the unemployment issues, you might bring your adjusted gross income down low enough to end up with a refund on Form 8962. In that case, including this form in your superseded return is well worth while, isn’t it?
These strategies won’t necessarily work for everyone. You’re probably going to need the help of an experienced tax professional to handle this. If they apply to you, the tax savings could be enormous.
And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At https://iTaxMama.com/AskQuestion
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