As with most issues in tax, the reply to the query posed on this headline is “it depends.” Individual returns can’t be e-filed till February 12, 2021, however laws pending in Congress leaves unanswered questions for each taxpayers and tax practitioners that would have an effect on taxpayers’ 2020 earnings tax returns.
Economic Impact Payments and the Recovery Rebate Credit
The quantity of the primary two rounds of financial affect funds (EIP1 and EIP2) was decided by taxpayers’ 2018 or 2019 tax returns, relying on what info was obtainable on the time the funds had been issued. These EIPs (popularly often called stimulus checks) had been advances on a 2020 tax credit score, the Recovery Rebate Credit (RRC). Taxpayers should reconcile the quantities obtained for EIP1 and EIP2 on their 2020 Form 1040 (Line 30 plus a worksheet) to find out in the event that they obtained an excessive amount of in stimulus funds or not sufficient. Taxpayers who obtained an excessive amount of is not going to be required to repay overpaid quantities; taxpayers who’re due extra stimulus cash will obtain it once they file their 2020 tax returns.
Both homes of Congress not too long ago handed measures that may enable the $1.9 trillion American Rescue Plan to be applied as a part of the annual price range reconciliation course of. The invoice contains extra Economic Impact Payments of as much as $1,400 per taxpayer (EIP3). An modification to the invoice point out Congress desires decrease earnings limits for receiving the funds, however didn’t specify at what degree funds would start to be phased out. Assuming the invoice passes, which appears to be like seemingly, it stays unclear whether or not EIP3 would must be included as a part of the Recovery Rebate Credit reconciliation on a taxpayer’s 2020 tax return or on a future 2021 return.
So what to do? In common, the consensus amongst tax practitioners seems to be to attend to file, at the very least for a short while longer. Why? Because if EIP3 passes and is required to be reconciled in your 2020 tax return, and that return has already been filed, you’ll have to amend your return. The IRS, whereas it’s lastly updated on opening mail, remains to be manner behind on processing mail.
Late final yr the IRS lastly allowed digital submitting of amended returns for tax yr 2019— if the unique return was additionally e-filed. At this time it’s unclear if e-filing of amended returns will likely be obtainable for tax yr 2020. If not, meaning amended 2020 returns have to be filed on paper. The IRS remains to be working by a backlog of paper filed 2019 tax returns. Their most up-to-date info signifies that as of December 25, 2020 they nonetheless had roughly 6.9 million unprocessed returns. Amended 2020 returns (to not point out paper filed 2020 tax returns) will merely add to this backlog. Additionally, most paid preparers cost for submitting amended returns and will not be in a position (or prepared) to file them till after the 2021 submitting season ends.
The solely purpose to not wait could be in case your 2020 earnings is decrease than in 2019—if it’s increased, that’s another excuse to attend. As I discussed above, proper now the present laws has an modification that introduces means testing for receiving EIP3 however doesn’t specify a threshold past which a taxpayer could be ineligible for EIP3. If you file your 2020 return with increased earnings and EIP3 is predicated in your 2020 earnings then you may obtain a diminished fee or no fee in any respect. Both of the prior funds began phasing out at $75,000 for single filers and $150,000 for joint filers. Nevertheless, till the regulation truly passes there is no such thing as a manner of figuring out what the section out thresholds will likely be (or if the edge will likely be a cliff past which your fee is eradicated somewhat than steadily phased out).
More Reasons To Wait
While the quantity of an advance fee (EIP1 or EIP2) couldn’t be used to offset again taxes, once you reconcile the quantity in your 2020 tax return any overpayment can be utilized to offset your present stability due or again taxes. The National Taxpayer Advocate has mentioned that that is unfair. It is unfair, however it’s a consequence of the distinction between an advance fee of the credit score and the way tax credit work on a tax return. And, with submitting season already right here, the IRS merely doesn’t have the time or the assets to reprogram their methods to deal with the inequity even assuming they wished to take action. They might, nonetheless, be advised to take action by Congress though at the moment that appears unlikely.
Also trying attainable however unlikely is the passage of the Coronavirus Unemployment Benefits Tax Relief Act launched just a few days in the past by Senator Dick Durbin (D-Illinois) and Representative Cindy Axne (D-Iowa). This invoice would exempt the primary $10,200 of unemployment from federal (however not state) earnings tax. The invoice didn’t make it into the American Rescue Plan as an modification, so whereas this is able to be a win for taxpayers, it’s unlikely to go earlier than submitting season ends on April 15, 2021.
Finally, it’s possible you’ll merely not have all your tax paperwork in time to file by the common submitting deadline. The deadline for partnerships and S-corporations to file their returns and challenge K1s to their companions and shareholders is March 15, 2021. Many practitioners who put together returns for these purchasers are indicating that they are going to be placing most of those returns on extension till September 15, 2021 whereas they wait for extra steering regarding Paycheck Protection Plan (PPP) loans and the Employee Retention Credit (ERC) and the interaction between the 2. Taxpayers who obtain K1s from partnerships or S-corporations might not have them till properly after the April 15, 2021 deadline.
Nevertheless, it’s possible you’ll not be capable to wait it out. Even the “fast track” price range reconciliation course of isn’t precisely quick. Reports are indicating that Congress’ purpose is to have one thing signed by the point unemployment advantages expire on March 14, 2021. That doesn’t go away a lot time for submitting, particularly when you use a tax practitioner. Even extra so than common the return submitting course of has quite a lot of shifting elements. Practitioners predict to spend further time on virtually all of their purchasers’ returns this yr to make sure that the purchasers are receiving all the advantages to which they’re entitled and to make sure all gadgets (unemployment, wages in a number of states, and so forth.) are reported precisely.
In common, if you’ll be able to wait to file for at the very least just a few weeks after e-filing opens (at the very least till the tip of February or first week in March), that may be prudent particularly if advisable by your practitioner. If you do rush to file for income-related or different causes (e.g., you want your refund now) bear in mind that it might be essential to amend your return to obtain extra advantages or if extra tax paperwork arrive after your return is filed. It’s shaping as much as be one other loopy submitting season so be as affected person as attainable and be type to your tax practitioner!