The IRS continues to implement the American Rescue Plan. There is still a lot of unknown. Decisions are still being made. We need patience as IRS works through implementing the plan, the tax software companies update their software, and we at Planning with Purpose determine how to implement these changes and updates. Here is the latest information we know.
Stimulus Payments:
Many individuals have received their stimulus payments. For some – the amounts they received are not what they expected. The amount you are receiving is based on the latest tax return you filed. If you have not yet filed your 2020 tax return, you know the amount you received is based on your 2019 tax return. If you filed your 2020 tax return and have received your refund, you know that IRS processed your 2020 tax return. Your stimulus payment would be based on your 2020 tax return. There may be questions for those who filed their tax return with no refund yet issued or had a balance due. It is unknown where your return is in the process, so that the amount could be based on either year’s tax return.
For many – with no dependent changes and who are not in the income phase-out ranges, whether your payment was based on 2019 or 2020 will not matter. For those with changes that impact their 3rd stimulus payment, you will probably need to wait until you file your 2021 tax return for any additional amount. The difference will be reconciled there. If you are eligible for more of the credit, you will receive it as part of your 2021 tax return refund, or it will reduce your balance due.
With the 1st two stimulus payments, if you received more of a payment than you were eligible for, you are not required to pay the amount back. We are anticipating the same will be true for this 3rd stimulus payment.
As a reminder – please keep the documentation regarding the amount you received for this 3rd stimulus payment. We will be required to complete a 2021 Recovery Rebate credit worksheet. There may be no net tax consequences, or you may receive an additional payment – in either case, we will have to report that amount that was received. Keep a copy of your bank statement. Keep a copy of the check stub or make a photocopy of the check stub or debit card. Make sure that you have that information available when you file your 2021 tax return.
Unemployment Benefits:
As we previously reported, the first $10,200 of unemployment benefits received in 2020 is tax-free. IRS recently announced if you have already filed your tax return and claimed these benefits as income, they will automatically recalculate your taxes due, adjust the amount and send you your refund. We are unsure how quickly this will happen, and we cannot be sure when that refund will be coming.
NYS has not yet decided whether they are going to allow the exclusion. It appears they are leaning in the direction of continuing to have it be taxable. We will contact those that are impacted once the final decision is made.
We currently are delaying the processing of any tax returns with unemployment until the states have made their decisions. The tax software must be updated to calculate the taxability of unemployment correctly.
Tax Return Deadlines:
Most of you have probably heard that the new tax season filing deadline is now May 17, 2021. At Planning with Purpose, we are still working on getting all tax returns completed by the usual April 15th deadline.
Returns that have been filed with a refund will continue to be processed. Those refunds will be directly deposited into your bank account, or a check will be sent as you requested on the tax return. We are hoping those returns will be processed timely and refunds sent out as expected.
If you have already filed your tax return and requested a direct debit of your balance due, IRS is working to develop a system to give you the option of delaying that payment until May 17th. Look for updated information as it becomes available.
For those whose returns have not yet been e-filed and it contains a balance due, it will be your decision if you want to choose the direct debit option. At this time, that requires the payment to be deducted on or before April 15th. If you want to be sure that you can control when the payment is made, you may want to choose to mail in a check rather than chose the direct debit. We caution you to make sure you send out the check payment to arrive timely. Many of us are experiencing mailing time delays, and you do not want to incur penalties for late payments.
To be clear, we can electronically file your tax return at any time. This will allow any refunds to be processed. You can delay the payment until the May 17th deadline even if we electronically file the return now.
Estimated Tax Payments:
IRS has extended the time for the first payment date from April 15th to May 17th. You can continue to use the voucher that you previously received with the due date of April 15th. We again caution that you mail the payment to be received timely even if there is a delay in mailing.
We believe that NYS will follow and allow the 1st estimated tax payment to be due May 17th. A definitive decision has not yet been announced. We will keep you updated as information becomes available.
Child Tax Credit:
As we discussed in our March 18th blog post, there has been an increase in the child tax credit. For children under the age of 6, the amount has increased to $3600. For those aged 6 to 16, the amount has increased to $3000. And – for now, children age 17 also qualify for a child tax credit of $3000. The American Rescue Plan also provides the opportunity for you to receive ½ of that amount in monthly payments.
IRS is working on an online system to allow you to start getting these payments or opt-out of the advance payments. They are anticipating it should be available in the next 30 days. We will provide additional information when the online system is set up.
This is an advance payment for dependents that qualify for the child tax credit on a 2021 tax return. Any advance payments that were paid in error will be required to be paid back as part of the 2021 tax return. This can be a concern for divorced parents who are alternating dependents each year. This should be a concern for parents of children who will turn age 18 during 2021 since they will not qualify. We suggest opting out of the advance payment if you know you will not be eligible when you file your 2021 tax return.
I wish we had more answers. There are a lot of rumors out there, and we do want to provide accurate information. We will continue to seek out answers, contact those impacted by them and provide what we can in upcoming blog posts.
