SMITH BRAIN TRUST – In February, Maryland Smith’s Samuel Handwerger told Smith Brain Trust four reasons why it’s smart to file your tax returns early.
Now, he’s back with more advice, and two reasons why – this year, for some taxpayers – it might actually pay to file late.
On March 11, 2021, President Joe Biden signed the American Rescue Plan. With it came a new stimulus package and a change to the taxation of unemployment benefits in 2020. Both changes call into question the wisdom of filing early, he says, at least for this year. “Let’s tackle both,” says Handwerger, “but first the unemployment money.”
Reason 1: Unemployment insurance
In that original article, Handwerger, a CPA and lecturer in the University of Maryland’s Robert H. Smith School of Business, was dispensing advice to the nearly 40 million Amercians who collected unemployment compensation insurance in the pandemic year of 2020. Unemployment insurance is taxable and few people have tax withheld, so his advice was to file early to allow enough time to budget paying the tax by April 15, when the tax money is due without being subject to a late penalty.
“Oops. That was good advice then, but now the rules have changed,” he says.
Now for families with adjusted gross income of less than $150,000, the first $10,200 of unemployment insurance received in 2020 is not taxable – and double that amount for married, filing joint taxpayers.
“Hey, wait a minute,” says Handwerger. “What about the nearly 55 million people who took my advice and have already filed their tax returns for 2020? Surely many of those returns followed the law before the change and paid tax on some amount of unemployment insurance compensation that is now not taxable. What should they do?”
In any other year, it sounds like they should reach for Form 1040X, and file an amended tax return, he says.
But this year, the IRS asked taxpayers not to file an amended return and instead announced that the IRS would send the appropriate refund automatically. “OK,” Handwerger laughs. “Ever try to convince a taxpayer client to wait for a refund as calculated by the IRS?”
Nevertheless, Handwerger says he is officially advising anyone who falls into this category and who has already filed their tax return to sit tight. “Don’t do anything yet.”
Reason 2: The Stimmy
What about this new third stimulus check that may be coming your way?
The new stimulus is worth $1,400 per taxpayer and their dependents, subject to income limits. It will be based on your 2020 return income, or your 2019 if you have not yet filed 2020.
“But it really is a 2021 credit, based on the 2021 return, such that the payments being made today are advance payments using the 2020 or 2019 return numbers, as the case may be,” Handwerger explains. “So, if you do not qualify for a check with your 2019 or 2020 returns, but if you do qualify in 2021, you still get the credit. On the other hand, if you do not qualify in 2021, you do not have to give back any money you received in advance. Got it? Neither do I,” he jokes.
“But what I do know is that if your 2019 return qualifies you for the credit, but your yet-unfiled 2020 won’t, don’t be in a hurry to file that 2020 return. Let the IRS use the 2019 return to issue the credit,” he says.
With that advice, you can take advantage of one of those loop-de-loop rules the IRS is known for. Taxes may be a certainty, but they are by no means straightforward.
“This is what is otherwise known as legally gaming the system,” Handwerger says. “As a tax preparer, this is what real love is all about.”
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