Hello again, everybody. This is Tom O’Saben, Enrolled Agent, Assistant Director and Professional Education and Outreach for Tax School. I’m a Fall Tax School instructor, author and reviewer of the University of Illinois Federal Tax Workbook, and heavily involved in the webinar series that we do throughout the year. And I’ve been bringing you these weekly blogs for almost two years now. In addition, I’m a tax practitioner with more than 31 years experience, so I hope you enjoy the information we’ve got to bring to you today, as we’ve been doing every week. Today I’m going to call our offering to you, “Tom’s Tax Season Tidbits” and let’s take a look at just what tidbits I may be imparting to you today. In particular, we’re gonna be talking about more guidance were received this past week from IRS regarding the May 17th filing deadline for individuals. We’re going to talk about when is an exclusion, not an exclusion. Can we have faith in the healthcare sharing ministries? And finally, is nontaxable necessarily a synonym with tax free? So I hope I’m grabbing your attention with these ideas. And let’s go right into them, away we go.So we got more guidance regarding the May 17th due date, IR 2021-67 was released just on March the 29th. There’s a URL for you to go ahead and copy and paste into your search engine. We have some final guidance now, I wasn’t going to bite on the number of postings that were out there on the internet, which said well, if May 17th is the new April 15th then people should have until that date to file or fund HSAs and IRAs for 2020. I wanted to hear that from the horse’s mouth and here it is in bulletin 2021-67 IRS says that taxpayers have until May 17th to fund IRAs an HSAs intended for 2020. Also too, if there are 2017 returns out there that either haven’t been filed or clients wish to amend, though that year would have closed on April 15th, you have another month, you have till May 17th, to file that 2017 return or amend that 2017 return I would expect you’re looking for a refund for the benefit of the taxpayer. But you still have now another month, rather than just a couple of weeks. However, I think it’s very, very important to mention to you that unlike the extension or the change in the filing season that we received last year, this change is very much more pointed and directed toward what goes to May 17th. And there’s still some important areas that have not yet been addressed by IRS, or as far as we know right now, still have April 15th as a due date. What are those? Well, we have the first quarter 2021 estimated tax payments on the federal level, still due April 15th. If you’ve got a C Corporation that’s filing on a calendar year, April 15th is the due date. So at the very least on April 15th, we need to get that extension filed. Same is true when we’re filing income tax returns for an estate or a trust, the 1041 series, unless we get a change from the IRS and as the time of recording of this blog, it was not changed, that due date is April 15th. So again, at the very least, we need to get the extensions filed for those returns to avoid any penalties for the client. So some good news, still some non news, so we’ll have to work with what we’ve got.
The next area we want to talk about is when is an exclusion, not an exclusion. In particular, I’m talking about the ability of taxpayers to exclude up to $10,200 of unemployment benefits, or $20,400 for a married couple filing jointly. In the American Rescue Plan, and we talked about this in a variety of blogs since the Rescue Plan came out in mid March, we saw that the taxpayers income has to be under $150,000. Neither taxpayer, nor $150,000 were in fact defined. We found very positive news coming out of IRS last week, which said a couple things. Number one, a taxpayer is any taxpayer. So a married couple filing jointly has $150,000 limit, a single person has a $150,000 limit. So they didn’t interpret it to cut that in half or allocate it differently to a head of household, but was really, really positive in the IRS interpretation was that the $150,000 and I’m going to call that a cliff because when our client is at $150,000, no amount of unemployment is excludable. If they’re at $149,999, they’re fine. At $150,000, they’re out. What the IRS determined was that that $150,000 definition is without inclusion of any unemployment benefits. Okay, that’s really great, very taxpayer positive, but we’re finding that, well, we can exclude income, but not always. And we’ll get into that next.
Now, I copied this right out of the IRS instructions, which it basically says, if we have some adjustments to income that we do, or some adjustments we make on a tax return where either inclusion of income or limitations on deductions are driven by modified adjusted gross income, we’re going to have to include all of the unemployment benefit in that calculation, not just the amount that might remain on a return after exclusion of $10,200 or $20,400. Let’s see exactly what we’re talking about. When we do a determination about taxable social security benefits, and I have to put a shout out here to Bob Rhea, Tax School instructor, all around good guy from Camp Point, Illinois. Contacted me the other day and said, “Hey, really liked your blog, Tom. I wonder what the impact is on taxable social security?” I was originally of the belief that said, well, you use the Schedule 1, line nine, which is after the exclusion of $10,200, or the limitation of some of that unemployment. Well, we find out in our worksheets that no, that is not the case. And that’s exactly what the IRS instructions and that’s what I got here, from their bulletins say, for taxable social security benefits, use all of the unemployment in the calculation of what’s going to be included in income, not just the amount after exclusion. And again, shout out to Bob because I went ahead and ran that through our software and sure enough, that’s exactly what’s happening. The same is true for an IRA deduction. Another call I had this past week, Debbie Held from the northern team of instructors. Debbie is also an employee of the IRS. She says, “Hey, I’m working on a return here and I’m trying to do an IRA deduction. This client has unemployment and it looks like all of the unemployment is coming into play for the definition of modified adjusted gross income.” I said you’re absolutely correct. She says she was going to run that up the flagpole at the IRS to see what kind of response they have to say, as of today, these instructions have not changed. Nontaxable amounts of Olympic or Paralympic medals and Olympic Committee prize money. This would be another shout out to Deb, where her nephew is an Olympic swimmer. She’d be very interested in this, given the fact that if we’re going to look at what’s nontaxable, we’re going to have to include any unemployment that the individual might have received. Where we have the exclusion of interest from Series EE or savings bonds after 1989 an income driven deduction again. In calculating how much can be excluded, we have to include all of the unemployment. The exclusion of employer provided adoption benefits. Again, in that calculation, for modified adjusted gross income, all of the unemployment benefits, the tuition and fees deduction, are we going to be above those income phase outs include all of the unemployment received by the taxpayer or payers. And finally, the deduction of up to $25,000 of losses on rental properties. You know, that’s an income driven decision, include all of the unemployment in that calculation of the modified adjusted gross income for that taxpayer. So in certain circumstances, an exclusion is not an exclusion. Be careful in your planning with these items.
Our next area talks about the faith in healthcare sharing ministries and by faith, I’m talking about faith in a tax deduction. Again, shout out to Bob Rhea — he mentioned to me in another email, when we talked earlier this week, that back in June of 2020, we had IR 2020-116. Let me paraphrase it for you, there’s the URL if you want to paste it and take a look at it in more detail. But basically, what they were saying is this, proposed regulations were being considered that contributions that are made to healthcare sharing ministry may in fact qualify as self employed health insurance for our Schedule C or Schedule F filers are more than 2% S Corp shareholders. Looks like that could be the case. Now I will tell you that healthcare sharing ministry contributions have always been considered an exception for taxpayers not maintaining minimum essential coverage when we had penalties for not maintaining minimum essential coverage under the Affordable Care Act. So what happened though is this was supposed to be a proposed regulation to take effect January 1st of 2021. Well, Bob being the studious person that he is, didn’t like the wording of the regulation or the discussion in IR 2020-116 so he called an IRS associate counsel on March 29th. The associate counsel said, well, this was more of a dream, or an idea than it was a proposed reg. and it is very likely not to become a final reg. So again, B Heart B, shout out to you, Bob. That it looks like in planning with your clients in 2021, I would not consider at this point until we received more guidance from IRS, you want to scrap the notion right now that for 2021 contributions to healthcare sharing ministries are considered as self employed health insurance for potential self employed health insurance deduction. Again, stay tuned, we’ll keep you up to date and Bob will keep me up to date as quickly as information becomes available.
The other topic I want to talk about that I ran across this last week is the discussion of does nontaxable equal tax free. Now what I’ve got here for you, is a carve out of box 18 from an actual K-1 that I got from a client this last week, 1065 partnership. Here we have box 18, tax exempt income, nondeductible expenses. So I’m just going along and entering the information from the K-1 and I get to this and I see this code B $19,679 and I’m thinking, wow, that’s a whole lot of money. I mean, the code C there is nondeductible expenses-could have been penalties, could have been half of meals and entertainment, who knows this allocable share to this to this partner. So I thought, well, let’s see if we’ve got more information provided in the K-1 packet, and we certainly do. So we have a statement on the next page which says, hey, box 18 code B, look what it is, ladies and gentlemen, PPP proceeds $19,679. So I know what’s being done here. This was the amount, the applicable share, to this partner of the amount of PPP loan that was forgiven. So what the accounting firm had done is they had called this tax free income, which again, is that the same thing as non taxable income? I don’t think so. So my concern is twofold. And by the way, I’ve got an email off to the issuer of the K-1 to say, I don’t think this should be in this box. And it doesn’t really change anything for my taxpayer. But I’m worried about us, first of all, tired, stressed, trying to get another tax return done. You put this in your software from that box 18, I’m almost sure your software is going to consider to be tax exempt interest, like interest earned on municipal bonds, which could impact that client receiving social security, would also be an add back likely for state income tax purposes. And then secondly, if we leave it off, is there a possibility of our client receiving a letter from a state Department of Revenue in a couple years saying, hey, why didn’t you include the $19,679 as an add back to our state return? I see potential problems here. Again, I understand what happened is, the amount was forgiven, so for book purposes, it is non taxable income. But I don’t necessarily think that’s a synonym with tax free income in our world. What I am suggesting to the issuer is that that information be provided in box 20 as other information, and let’s not have it in that tax free area to have confusion come out as it being something that was earned on municipal bonds.
So again, another week in tax season, more fun. I will tell you again, please participate in our Facebook group. Some of this information that I’ve been providing in this blog, as soon as it comes out in an internal revenue bulletin, I try to get it on the Facebook group as quickly as we can. So you’ve got that information as you’re going through day by day, rather than waiting for these weekly update blogs. But we will keep you posted as information becomes available. And we’ll get through this, all of us will get through this together. So for everyone at the University of Illinois Tax School, this is Tom O’Saben saying we’ll say goodbye, for just a while.
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