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Individual Filing Extension & American Rescue Plan Updates

Individual Filing Extension & American Rescue Plan Updates

In this video, Tom covers news of the individual filing extension as well as updates to specific provisions of the American Rescue Plan. Topics include handling of federally tax-free unemployment, new $1400 stimulus payments, and planning with the Advance Premium Tax Credit “no payback” rule in 2020.

*UPDATE 3/23/21: Around the 10:15 mark in the video, regarding federally-excludable unemployment, the acronym to use on Line 8 of the Schedule 1 is UCE (not UEC as shown).

by Tom O’Saben, EA

Video Links:

IRB 2021-59

PDF of slides used in the presentationPDF

Hello again everybody, this is Tom O’Saben coming to you from the University of Illinois Tax School, I’m going to do another video blog this week. So you can see all the information that I have on the various screens. There’s a shot of me from oh, within the last five years, let’s just say. So for those of you who don’t know me, again, my name is Tom O’Saben. I’m an Enrolled Agent, I’m the Assistant Director of Professional Education Outreach for Tax School, I’m also a Fall Tax School instructor and author and reviewer of the University of Illinois Federal Tax Workbook. I’m heavily involved in the development and presentation of our webinar series. And also these weekly blogs, which I hope you’re enjoying, although I hope for them to be quick hit tidbits with law changes coming fast and furious, they seem to be getting longer and longer. So all I can say is that I feel your pain because as like you, I’m a tax practitioner in my 31st year of doing these taxes, and it keeps changing. And we’ll get into our conversation right away.

So what are we going to talk about today? Well, we’re going to talk about changes that have happened in the last week, on March the 13th we did a blog on the American Rescue Plan. And I would strongly suggest that if you haven’t had a chance to look at that blog that you do so, it’s available to you on the University of Illinois Tax School website, just click on the little bar that says read the weekly blog. We’re going to talk about the individual filing extension and then we’re going to get into some of those provisions of the American Rescue Plan where we’ve had some additional guidance. One being the handling of Federally Tax Free Unemployment. Another one some of the discussion I’d like to have regarding the $1,400 stimulus payments, which I’m certain that many of your clients have already received, maybe you yourself, have already started to receive. And then I want to get into this provision about planning with the Advanced Premium Tax Credit, what I call the “no payback rule” that exists in 2020. I actually think this is one of the biggest provisions for our clients in the American Rescue Plan. And originally I thought that maybe I was reading it wrong, because there’s been no press about it, but this is a really big deal and we’ll talk about it as we go through these various provisions.

So let’s talk about the individual filing extension. On March the 17th, I was putting out some news wire reports on our Facebook page, that it looked like there was going to be an imminent movement of the April 15 deadline and as the day went on, it seemed to be leaning itself towards May 17th. Many of you commented that you really didn’t want speculation put out there, but you wanted the realities. So ladies and gentlemen, here it is it’s Internal Revenue Bulletin 2021-59. If you look down there at the bottom of the screen, you can see the link at the if you want to read the bullet yourself and I would strongly advise that you do. Here’s what the bulletin says, it says as for now, and this could change at any moment, only individuals have a filing deadline of May the 17th. So May the 17th becomes the new April 15. Why did I highlight as of now? Because this is exactly what the IRS did last year, when they first started talking about changing the filing deadline. They were very narrow and very specific in their change of the filing deadline and then the rules expanded from there. It looks like we’re going to have the same thing this year, but all I can do is talk about the reality of what we have right now. So going beyond that, I would say stay tuned for the future vlogs that I’ll do and we’ll do those as quickly as we can, as soon as information comes out. So, individuals now have a filing deadline of May the 17th. It does say in the bulletin 2021-59 that estimated tax payments are still due on April 15, this is an important provision. But what about C corporations that are on a calendar year? What about 1041’s for estates or trusts that are on a calendar year? Are they still April 15? Without further guidance from IRS, I’d have to say yes, they still have an April 15 filing deadline. What about the deadline for filing IRAs and HSAs? To be honest with you, I hadn’t thought about that. But we had a mid tax season check in with our instructor pool. And I’ll put a shout out to Bob Rhea who said hey Tom, in the blog you’re going to do how are you going to address the funding of IRA’s and HSA’s? And I said, wow, I didn’t think about that because typically if you want to treat an IRA funding or HSA funding for the previous year, you have till April 15. I don’t know the answer to give you today, ladies and gentlemen, but I would strongly suggest that you take a conservative approach and tell your client you know, the safe thing to do is get that funding done by April 15th just so we’re safe. So, so what? So what’s a month early? Better to give a conservative answer then find out that the IRS says later oh, no, we didn’t extend that, but nonetheless, be careful. Are the states going to follow along? Listen, the states do not have to conform to federal law. I will tell you that on Thursday, March the 18th, I’m coming to you from the state of Illinois. The state of Illinois released an announcement which said, yes, we’re going to go and change the filing deadline for individuals to May 17th, like the federal government has done, and also keep the filing of estimates tied to the traditional, April, June, September and January. I believe the state of Missouri has also done likewise, for those of you who know me, I’m in the am in the St. Louis area. So the two states that I’m most concerned about, are in fact, Illinois and Missouri,. You may want to check with your state, if you’re coming to us from different parts of the country. Again, there’s that link down at the bottom of the screen, it’s not a hyperlink, you can’t click on it. But nonetheless, go ahead and maybe you can do a copy and paste into your Google machine, as we call it and you can take a look at the Internal Revenue, bulletin yourself and see what you might derive from it.

The next area I want to talk about goes back into the American Rescue Plan and it’s the issue of tax free unemployment for federal filing reasons. This is 9663(g) of the American Rescue Plan. This is the provision that says that $10,200 per taxpayer can be excluded as long as the adjusted gross income of the taxpayer, and that’s what the law says, taxpayer, is under $150,000. Now, a couple of things that I don’t know the answer to yet and I mentioned that in our American Rescue Plan blog of March the 13th is what’s the definition of a taxpayer? Does this mean that everybody has this $150,000 limitation? So a married couple filing jointly is the same as a single or married filing separately or head of household? I don’t know, waiting for guidance. I will tell you that 9663(g) does say that for a married couple filing jointly, that they could exclude up to $10,200 each, assuming they received that much in unemployment. But that is a limit per taxpayer. I’ll describe that in an example I’m going to do in just a little bit.

IRS has given us some guidance, which says not to amend returns that have already been filed, where all of the unemployment has been included in income. They said that the IRS has the mechanics in place to make those adjustments. I don’t know if that’s the best answer, ladies and gentlemen, I don’t want to go against what the service is saying. But I think you all well know that when you make a change on a tax return, it’s like a stack of dominoes going down, isn’t it? So is the IRS going to be able to recalculate other items on those on that return? For example, If we knock off $10,200 or $20,400 of adjusted gross income, could the stimulus payments that we’re maybe recalculating for the client, could those have been enhanced? Could we have education credits now being allowed? Could we have less suspended losses on a rental property? Could we have more medical expenses allowed? Does IRS have the mechanics in place to see the impact of reducing that adjusted gross income? Are they going to approach this with tunnel vision to just eliminate the $10,200 or $20,400 for a married couple? I don’t know. So is that really a good decision? I’m not sure of that answer. I think it would make sense for us to take a look at what amending the returns would entail. I know clients are calling and I know many of you and again, I feel your pain, I’m a practitioner just like you are. Is the best answer to tell our clients, listen, we’re not going to touch these things until we get through the filing season. That’s your call, just kind of handhold, pat people on the head, and say just hang on, you don’t understand what we’re going through, it’s a really, really tough tax season.

So let’s talk about handling the returns that we’re filing now, where we have unemployment benefits. Perhaps your software hasn’t caught up to this yet and maybe it will by the time you’re watching this vlog, but there’s a worksheet that the IRS is developing. But in in advance of that, here’s what they’re telling us to do. When you have unemployment compensation that a taxpayer receives, it’s going to be shown on line seven of Schedule One of 1040, just like I’m showing you here on the screen. What the IRS is telling us to do is that if we have unemployment benefits that we’re going to exclude and then we’re going to assume here in my example of Joe taxpayer, that the adjusted gross income is less than $150,000. And again, the other the other answer I don’t know is that $150,000 before we exclude $10,200? I would assume so, but I really hate to assume with anything dealing with taxes. So they tell us go ahead and show the gross amount of benefits on line seven and then on line eight, use the acronym I have circled here for you, UCE, that stands for Unemployment Compensation. Don’t put more than $10,200 on there unless, again, you’re dealing with a married couple. And in our case of Joe taxpayer here, his $15,000 of benefits for federal purposes, only $4,800 is going to carry over to the front of his 1040. Now, let’s say that Joe was married to Betsy and Joe got his $15,000 of unemployment and Betsy got $2,000. Does that mean, we can exclude $17,000? No, our limit is per taxpayer. So on Joe’s we could exclude $10,200, on Betsy we’d be limited to the $2,000 she received. So we’re supposed to have worksheets that come out that will tell us and I would assume there’ll be some kind of a calculation done in your software. But this is the initial kind of shot across the bow, as for those clients who say, I want to file my return, I want to file it right now. Well, I have another question for you. What are you gonna do about the states? I will tell you that on our Facebook group, there was a posting from a software company that dealt with the different states, it’s not substantial authority as to whether or not they are conforming with federal changes. Again, where I’m located I’m very interested in not just an Illinois law, but Missouri. What is Illinois say? Illinois says we don’t know yet. That’s a release that they did around March 17th, also, that they’re looking at the federal changes, not sure how they’re going to apply them yet. The State of Missouri, according to this report, the software company put out, is that Missouri is in fact conforming to federal law, which means they would allow the exclusion as well. I would suggest to you that you get that information directly from perhaps the Missouri Department of Revenue or whatever state you’re coming from, as opposed to a third party, that would be my concern that you deal with there.

About the stimulus payments under the American Rescue Plan, this is section 6428-B like boy, I want to remind you that this round of stimulus is substantially different from the first two. The first thing to mention is nobody got any money for dependents if they were over age 16. It kind of followed the rules for child tax credit, old rules for child tax credit, this round of stimulus will include those taxpayers on the return who are greater than age 16, but they’re still dependents. Could be a qualifying child, could be a qualifying relative, you might have a client who’s claiming their mother as a dependent, they’re probably going to get a stimulus payment for them. I want to warn you that there is a very quick phase out of adjusted gross income in this round of stimulus. Very, very, quick, I gave you the example here of married couples filing jointly starts to phase out at $150,000, by $160,000 it’s gone. The phase out of the other two economic impact payments was about a $50,000 range. So this then begs the question, and this is where you become so important to your client, and that’s on the planning side. The argument for married filing separately. You know, I had a Goldilocks situation just this past weekend that I want to describe to you for a moment or two, where it was just right. Married couple filing jointly income in 2019, about $165,000 income in 2020, about $165,000. So they got some of their stimulus, but not all of it. So it turns out that one of the parties makes about $100,000, the other party makes the $65,000. So in optimizing their return, it made sense to do married filing separately, put the children with the lower income earner which by the way, you can do that as long as the taxpayers agree. It’s only in a situation where they don’t agree that you have to apply tiebreaker rules and then follow the individual with the highest income. So we put the children on with the lower income person and we’ve accomplished a couple things. One, it was worth $1,500 bucks to them, you know that’s not chump change, $1,500 to them to do married filing separately versus married filing jointly. Secondly, this summer I’m reading articles, I have not seen this from the IRS, but there’s going to be a true up that the IRS after the filing season after May 17th and before September 1st is supposed to go back and look at returns that were actually filed for 2020 and true up some of the stimulus. So looking at my client, we just now we’re submitting the returns, so they’re probably not going to be seen for the first round of stimulus. But what do we got floating around out there? We’ve got a taxpayer under $75,000 of income under married filing separately, with three dependents. Is it possible that not only did we get them $1,500 now by married filing separately, but they might be looking at four more $1,400 stimulus payments. I want to point out to you that this is a 2021 credit. So those your clients who are losing their mind saying, I can’t believe I didn’t get this money. Worst case scenario is they get it when they file their 2021 return next spring, much like we’re doing with those 2020 returns. Look at the planning opportunity that you’ve got here with, with individual taxpayers. So I’ll be curious to see whether or not my client that I’m describing in this Goldilocks situation where not only did we get them $1,500 better than married filing jointly right now, let’s see if there’s a true up for them this summer, and $1,400 being sent off for the three children and for the parent this summer, or we are going to end up doing that next spring. Right now I just talked about the $1,500, so we’ll see what happens. And I have not seen a bulletin that I can tell you that there will be a true up this summer. I actually pulled that out of an article in the USA Today. So again, it’s it’s a news wire type of situation, not facts and circumstances.

The other thing I want to talk about is the Advanced Premium Tax Credit (APTC). This is for those clients who purchase their health insurance on the marketplace. You know, they get that 1095-A and then we’ve got to reconcile it on the Form 8962. This is in the American Rescue Plan, this is provisions 9661, 62, and 63. When I saw this, I thought well, Tom, are you going out on a limb here, because of the fact that the media is not covering this at all? But I’ll tell you, ladies and gentlemen, that I think this is the biggest, biggest planning thing that we have opportunity for clients that were that we’re dealing with, and why I call it the “no payback rule.” If you look at 9661, 62, and 63, and the American Rescue Plan, you will see that it says no advanced premium tax credit will be due back in 2020. Just 2020, it’s the only year. So you have situations where we are expecting that tax rates are gonna go up in the future, right? Our taxes are going to increase. President Biden already said it, they’re looking at raising taxes on businesses, and people earning over a certain amount. So certainly the atmosphere is there for taxes to go higher. So what we were doing with especially our self employed people, is that we have been messing with section 179 or bonus depreciation on equipment purchases, and trying to get them below that 400% of the poverty line. So we didn’t hit as I described here, the tripwire, which would cause them to owe back their premium assistance. And ladies and gentlemen, maybe this is why it’s not getting any media coverage because first of all, unless you’ve got a self employed person, there’s nothing you can do. I mean, you can’t tell people not to include W2 income, can you? So is it a situation where, okay, well we can exclude some unemployment so that may keep them below the trip wire, that’s a good thing. But for other people that are wage earners, if they would have been in a situation where they owe some of the premium assistance back, it’s waived off. I have a client who this benefit is going to be worth $26,000 for him, he and his family $26,000. They underestimated their income to the marketplace by half. Remember, again, this is only for 2020. So don’t run out to your clients who maybe are right now signing up for health insurance on the marketplace, which the Biden administration had expanded for people the signup that this provision I’m talking about is only 2020. One of our instructors actually contacted me this past weekend and said, am I reading this correctly? Are you telling me that no premium assistance is due back on a 2020 return? And I said that’s what I’m reading and I’m getting support to that position throughout the prepare community. And that’s exactly what they’re saying. For his client, he’s a hero to the tune of $24,000. My client, $26,000. So keep that in mind. And why I think this is the biggest planning tool is we don’t have to be worried about hitting that tripwire that’s the 400% of the poverty line, when we’re working on these 2020 returns. So if we feel as though taxes are going to be higher in the future, could we have the client accelerating income into 2020? And what do I mean by that? Taking less in the way of Section 179. Maybe opting out of bonus because we’re expecting that maybe we need those deductions in the future because tax rates are going to be higher. Is it possible we want to do a Roth conversion only it’s too late now to do a Roth conversion for 2020. But what about those people who maybe had Coronavirus distributions from qualified plans and we were thinking about spreading that out over three years? Would it makes sense to include all of that in 2020, they also received assistance for their health insurance from the marketplace and we worried about hitting the tripwire, tripwire doesn’t exist in 2020. So could we accelerate income into 2020 not having to repay the advanced premium tax credit they receive? And then going forward, we have deductions that are available are income we’ve already reported. Is that a possibility? I mean, I think this is like I said, a major planning opportunity when you’re sitting there preparing those 2020 returns. Taxes are likely to go up, I am not making a political statement, President Biden has said so. I know he’s targeting what they want to increase, but you know there’s an atmosphere of increasing taxes, especially with the unprecedented amount of government spending that has had to have been done to deal with the COVID 19 pandemic. Also, I might mention that under the Tax Cuts and Jobs Act back in 2018, we had EBL’s, excess business losses, those were suspended by the CARES Act for 18, 19, and 20. Ladies and gentlemen, what year are we in? We’re in 2021. So excess business losses are back and you can go and look at the American Rescue Plan. And by the way, if you do that, go ahead and Google American Rescue Plan and when that PDF comes up, hold your ctrl key down and press the F button, F like Frank, you’ll have a search box open up. If you want to look at unemployment or you want to look at advanced premium tax credit, you can put that in there. And it’ll give you the number of hits without having to go through pages and pages and pages of the tax law. That’s how I do my research and it certainly saves a lot of time. But these excess business losses are back and the American Rescue Plan actually is adding a year to them after the already codified sunset of the Tax Cut and Jobs Act (TCJA), EBL’s are being added on for another year. Let me tell you, ladies and gentlemen, that’s a revenue raiser for the government. So you can see that our clients are clamoring not just for money, that’s what they bug us about to get their returns done, but also, they’re clamoring for advice. The issue about whether or not to claim children when I talked about this true up. My stepdaughter, we’re letting her file her own return this year as an independent person. I told her what she’s going to get back. And then I said, there’s a possibility that this summer, you could get another $1,400, but worst case scenario is you’ll get that next year when you file your 2021 return. So we have that kind of circumstance as well.

So lots and lots of planning opportunities. And ladies and gentlemen, I know your heads are spinning, my head is spinning. All of us here at Tax School are like whirling dervishes with all of these changes going on. I mean, it’s an unprecedented, but we’ll be there for you. I hope this information is helpful. I feel like it is, let us know what you think in the comment section, also get out there on our Facebook page. If you’ve got specific knowledge about areas, please share that, it’s going to benefit everyone. And ladies and gentlemen, we will get through this together. So once again, I’ve gone long in these vlogs but there’s just so much information to share. At least you didn’t have to look at my face during this one. So for all of us here at the U of I Tax School, this is Tom O’Saben saying goodbye for just a while, but you know we’ll be back.

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