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Repaying Excess Advance Premium Tax Credits (APTC)

Repaying Excess Advance Premium Tax Credits (APTC)

The American Rescue Plan suspends the requirement to repay excess advance payments of the 2020 premium tax credit. How do we apply this rule? What are the key takeaways and planning opportunities for the APTC?

by Tom O’Saben, EA

Video Links:

IR 2021-84

Previous Blog Post on American Rescue Plan

Hello again, everybody. This is Tom O’Saben, Enrolled Agent, the Assistant Director for Professional Education and Outreach for the University of Illinois Tax School. I want to remind you again that I am a fall Tax School instructor, author and reviewer of the University of Illinois Federal Tax Workbook. I’m heavily involved in our webinar series we do throughout the year, and of course, these weekly blogs. And like you, I’m a tax practitioner and hard to believe that I’m in my 31st year of doing returns and it’s been probably the strangest 12 months, and I think you would agree that most of us have experienced in our careers.Continuing with our programs that we’ve been doing during tax season, which of course tax season goes on until May 17th this year, I want to address the provision from the American Rescue Plan that I had mentioned some weeks ago on our blogs. And you might want to visit the University of Illinois Tax School and take a look at those previous blogs. We did one specifically on the American Rescue Plan in the middle of March, you may want to review that at your leisure, there’s no cost of doing it. But in particular, I want to talk about the IRS guidance that just recently came out with dealing with the fact that advanced premium tax credits for those taxpayers who purchased their insurance on the marketplace. And we find ourselves in a situation where they owe some of that premium assistance back that in fact, it doesn’t apply for tax year 2020 only because of the provision in the American Rescue Plan. Specifically in the American Rescue Plan, it suspends the requirement to repay any excess advanced repayments of the 2020 premium tax credit. I just answered some correspondence the other day for a client dealing with 2019. 2019, it still does apply, it’s only for the 2020 tax year that in fact, paying back too much premium assistance doesn’t apply. If you want to go to chapter and verse, you can go to Section 9662(a)(iii) of the American Rescue Plan where it specifically makes that statement. So with that coming out, and you might recall when I did the original blog on the American Rescue Plan, I was really kind of nervous about making that recommendation or that statement to all of you because of the fact that I didn’t see much talk about it in the media, I saw it in a lot of journals we look at like, for example, the Journal of Accountancy mentioned it, but not a whole lot of fanfare with it. And I believe this really became a pretty big provision for a lot of our clients and that’s going to be kind of the theme that I talk about as I go through this presentation.

So the question then became, after the guidance came out, or I shouldn’t say the guidance, that actually the law was passed, how do we apply that new rule? Do we need to wait for software updates? Do we need to wait for guidance? Or just not include the 1095-A information?  All of these issues actually made me extremely nervous, especially the third point, being one just not including the 1095-A information and we know from years past, bang, how quickly the IRS reacted if in fact, people had insurance purchased on the marketplace and we didn’t include that 1095 information, probably because we didn’t know about it. And then within a couple of weeks, the clients would get a letter from the IRS saying, Hey, you got to reconcile this thing on that form 8962.

So last Friday, or I should say on Friday, April 9th, IRS did finally come out with guidance on what we should do with the advanced premium tax credit, it’s IR-2021-84. And again, it was issued on April the 9th, I know some of your software providers kind of did what the IRS is telling us to do in advance of the notice, I will tell you that the software that we use in our office did not until they had clear guidance from IRS. There’s the website for you. Again, it’s not a hyperlink, you’d have to copy and paste that URL into your search bar in order to go ahead and pull up that Internal Revenue bulletin. But again, it’s 2021-84, just came out on April 9th, let’s talk about it.

So in particular, let’s talk about the key takeaways that exist within the Internal Revenue bulletin. Number one, I think you should go into your client’s return, I’m talking about returns you haven’t done yet, go ahead and enter that 1095-A information. If premium assistance is due back, then what I would suggest you do is print out the 1095 and that 8962 which shows that premium assistance is in fact due back to Treasury and scan that into your records, then delete the 1095 from the client record. I don’t like that answer, it’s probably making you nervous as well, but that’s what the IRS guidance says to do. The reason I’m suggesting to you that you go ahead and you put in that 1095-A information is my second bullet point on this slide, which says if a taxpayer and this is what the guidance says in the Internal Revenue bulletin, if in fact that client is entitled to more premium assistance, leave it on the return, they can have more assistance. I’ll give an example of a return I was just working on where the projected income to the marketplace ended up being much lower than what they had projected, the taxpayer is entitled to a refund, or in this case, a credit, advanced premium tax credit, we want to leave that in and the IRS says absolutely do that. So and again, in essence, what we’re talking about is if we put in the 1095-A information and it causes the taxpayer to owe some back, and let me tell you, I had a couple that were pretty big. One was over $5,000, the second one was the biggest one I saw. They hit that 400% of the poverty line with their income level, their income ended up being double what they projected, and in fact, they would have owed over $26,000, but because of the provisions in the American Rescue Plan they don’t owe any of it. Now, am I nervous about that return going in without the 1095-A?, You better believe I am. But nonetheless, we’ll be able to respond and cite the Internal Revenue bulletin on what the instructions were. Again, if it’s going to cause them to owe money back, take it out. If the client is going to be entitled to receive some additional premium assistance, go ahead and leave it in and then they in fact, will get that additional refund.

Now, another key takeaway from the Internal Revenue bulletin says, if in fact, we have returns that have already been filed, the IRS has taken the same position they were taking with the stimulus payments and with the unemployment guidance we got, is that don’t file amended returns.  I’m going to give you some planning opportunities I believe that exist for you to go ahead and file amended returns, or let’s say superseded returns in that, but we’ll talk about that in a little bit. But for those clients who have had advanced premium tax credit owed back, they owed money, they may have already paid it, the IRS is going to go ahead and review those returns, and automatically send refunds just like they were going to do with adjusting for the potential for $10,200 of unemployment to not be included as income, IRS claims, they will do it. Again, go to the Internal Revenue bulletin if you don’t believe me and you can see the information right there. You know what I mean? But if you want to hear chapter and verse, go to the Internal Revenue bulletin, and you can read it for yourself what the IRS says to do.

So what I’ve kind of been alluding to is does this 2020 waiver of repaying the APTC provide some planning opportunities? Well, I believe it does and I think it does from this perspective. You may recall from some of these blogs that I am of the opinion, and I think you might share this opinion with me, that tax rates only have one way to go here in this country, and that’s up. Somewhere along the line, we’re going to have to start paying our bills, aren’t we? So with that in mind, is in fact, 2020 a year where we were accelerating income into 2020 and decelerating expenses for a variety of reasons. So I’m thinking now one of the things we did in planning with people with premium assistance, and I say with people, by this I mean, self employed people, maybe a Schedule C, maybe a Schedule F. We would go ahead and manage either bonus depreciation or Sec 179 and avoid what I call here on the slide the “tripwire,” and you can play with your software and you’ll see exactly what I mean. And these calculations still work, even with the new guidance from IRS in that if that taxpayer family and that’s the term I used here, taxpayer family, whatever the size of it might be, if they were to hit 400% of the poverty line, bang, that’s the tripwire it caused all of the premium assistance to be recaptured, or in this case be an additional tax on the return. Now, is it possible that we want to think differently with my mindset, if you agree with my mindset, that in fact, we may be looking at a circumstance of do we want to try to save deductions and the tripwire be damned?

So by that, I mean, would it make sense then to revisit those already filed 2020 returns and amend out perhaps of Sec 179? Or I think this is a true statement, if we’re in the perceived extension season, even if we don’t have an extension filed that period between May 17th and October 15th, could we file an amended return and call it a superseded return? And say either we want to perhaps opt out of bonus or change the amount of Sec 179 we’re claiming. Why? Because we don’t care about the tripwire and let it go ahead and be hit because we take less Sec 179 or we don’t take bonus depreciation, because why, we want to harvest those deductions for future years, when we expect the tax rates to be higher. Again, I know we’ve been incredibly, incredibly busy, is it something else you want to think about? Go ahead and play with it. I played with one return yesterday and I think between letting the tripwire apply, I wasn’t able to harvest enough Sec 179 because what I was trying to do is get the client to a breakeven to what the original return was as filed, tough to do. And it’s also going to be tough to do if you’re in a state that has a state income tax because a lot of those states are going to pick up adjusted gross income and we’re going to increase the adjusted gross income because we don’t care about hitting the trip wire. But increasing that adjusted gross income is going to cause us to have a situation where they’re going to owe state tax and they could owe some interest because we’d be paying that after the original due date. Anyway, and that’s what I’ve been talking about here. Why would we want to consider doing this? Well, just as I’ve been mentioning, again, if you share with me, the philosophy that tax rates in the future are going to have to be higher, do we want to try to salvage or save deductions to be used in the future? And this is only going to work now, for those clients who are self employed, or perhaps they have rental property, they are purchasing their health insurance on the marketplace, and now we’re not worried on the 2020 return, by the way, just 2020, about hitting that tripwire where they would owe back premium assistance because again, we know it doesn’t apply in 2020. So what are my bullet points say, we say we may have accelerated depreciation again, like I mentioned Sec 179 or bonus, and that we use to avoid that tripwire, which in that short run was helpful, but in the long run, again, lessens our future depreciation deductions. And I’ve already mentioned, I’m kind of harping on it. Are taxes going to be higher in the future? Do we amend the returns, hit the trip wire, it gets waved off for 2020, the taxpayer has possibly more depreciation deduct on future returns. Maybe something for you to consider in planning with your clients after, I would tell you, after you get past May 17th.

So I, like you, weathered April 15th. I’m pretty darn tired, I bet you are too. We got another month ago. And we’re going to continue these blogs, we’re going to continue being right there for you with the resources that the U of I Tax School has available to you. Please go out to our Facebook page, great amount of membership and lots and lots of people who want to help you to succeed. I’m going to use a new moniker that I made up on my own, that yes indeed, when you’re dealing with us, there is an “I” in your team and that “I” is the U of I Tax School. So for all of us at the “I” in your team, this is Tom O’Saben and saying we’ll say goodbye, for just a while.

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