Category

tax forms

Category

Looking for your tax forms? Keep checking the mail: Employers are supposed to provide employees with Forms W-2 and other wage statements by February 1 in 2021.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) that was enacted on December 18, 2015, made several changes to the way we file taxes. Now, employers file copies of Form W-2, Wage and Tax Statements, and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration by January 31. That is also the date that Forms W-2 are due to employees.

However, this year (2021), January 31 falls on a Sunday. By law, that means that forms W-2 are instead due on the next business day, which is Monday, February 1.

In addition, some Forms 1099-MISC, Miscellaneous Income, and the newly re-introduced Form 1099-NEC, Nonemployee Compensation (more on that here), are also normally due to taxpayers on January 31, but in 2021, they will be due on the next business day, February 1, 2021.

Here’s a look at some other form due dates:

These are accurate so far as I know and as of today. If you’re not sure about a due date, check the form instructions.

The IRS Hasn’t Announced The Start Of Tax Season

I know you’re anxious to get started on your returns, but just because you may have your tax form in hand doesn’t mean that you can file. The Internal Revenue Service (IRS) has not yet announced when tax season will open, meaning when it will accepting paper and electronic tax returns. Last year, the IRS announced on January 6, 2020, that tax season would open on January 27, 2020. I expect a similar announcement any day now.

What Happens If You Don’t Receive Your Form On Time?

  • Some forms might have been issued earlier, so go back through your records if you’re missing a 1099 or a 1098-C. If you redeemed savings bonds, for example, the form 1099-INT might have been issued at the time of redemption. Similarly, if you donated a car to charity, form 1098-C would have been acknowledged within 30 days of the sale or 30 days of the contribution.
  • It’s popular to make some forms available online or via email. However, tax forms cannot be generated electronically without your consent unless a paper copy is also issued. However, in these days of e-statements and online transfers, it’s not out of the question that you might have checked a box to receive your information electronically. Check your inbox and your spam filter.
  • You may also want to hold off filing if you’re a beneficiary of a trust or estate, or a shareholder, partner or member of a pass-through company. Even though those entities now file a little earlier with the IRS than they used to, they rarely report early. Pass-through entities must prepare their tax returns before they can furnish Schedules K-1. Those Schedules K-1 might take until March or April to show up on your doorstep. In some cases, it could take longer.

If you haven’t received a tax form by the due date, here’s what to do:

  • Look around. Your form could be stuck in a magazine or lost in that pile of mail on the counter that you’ve been swearing to sort through for weeks. Your form could be at work. Before you assume that it wasn’t delivered, double-check.
  • If you’re sure that you didn’t receive your forms, contact the issuer. It might be easy to fix. You might not have received the form because of an incomplete or wrong address. Or maybe your form got lost in the mail. If that’s the case, the issuer can furnish another form: problem solved.
  • If your employer is no longer in business or has moved, try to make contact. It’s the fastest, easiest solution. If you don’t receive your forms and you don’t know where your employer has moved, send a note to the last known address; there may be a forwarding order at the post office. Or try Google. I know that it’s not your job to find your employer, but if you have time to click through Schitt’s Creek memes, you can search online for a change of address (and if you are clicking through Schitt’s Creek memes, feel free to pass those along to me!).
  • If you still don’t have your forms, or if your forms aren’t correct, contact IRS. The IRS doesn’t want to hear from you about missing forms until the end of February. But when you call, have your address, phone number, Social Security Number, and dates of employment available. It’s also helpful to have an estimate of your earnings, together with your withholding; you can find most of this information on your last pay stub. You’ll also need the name, address, and phone number of your employer. Make your life easier by being prepared before you pick up the phone.
  • Be patient. After your call, the IRS will contact your employer. The IRS will also send you a form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., along with instructions. If you don’t receive your missing forms from your employer by Tax Day, April 15, file form 4852. But be smart: don’t file to get your tax return in early or to teach an employer a lesson. If you file an improper form, you could be hit with substantial penalties.
  • You may need to amend. If you receive your tax form after your return is filed using a form 4852, and the information is different from what you reported, you will have to amend your return via form 1040X, Amended U.S. Individual Income Tax Return (downloads as a PDF).
  • If you need to replace a form SSA-1099 or SSA-1042, you can request a new one on or after February 1, 2020. The easiest way is to go online and request an instant, printable replacement form at www.socialsecurity.gov/myaccount. If that’s not an option, you’ll need to contact SSA directly, not IRS. To contact SSA, you can call 1.800.772.1213 (TTY 1.800.325.0778) or visit your local Social Security Office (find yours here).

One final piece of advice: do not file your tax returns until you’ve received your tax forms. I know it’s tempting. I know you think you know what’s on those forms, but what if you’re wrong? Not only are you making it hard on your preparer to figure it out, but you’re also asking them to break the rules: the IRS bars tax preparers from e-filing tax returns with pay stubs (without receipt of forms W-2, W-2G and 1099-R). There are whole threads on social media about tax pros who feel victimized by taxpayers insisting that they file early: don’t be that guy (or girl).

Filing before you have your forms in hand also sets you up for a potential audit. For starters, the IRS matches forms W-2 and forms 1099 to the information on your tax return. If the data doesn’t match, the IRS will flag your return. My mom – who is right almost all of the time about everything – used to tell me that it was okay to be different. That might be true in junior high, but it’s not true at the IRS. Trust me. You want your tax return to look like everybody else’s tax return. Don’t give the IRS a reason to give yours a second look.

Estimated reading time: 5 minutes

The Internal Revenue Service (IRS) has released the very-probably-unless-Congress-does-something-soon final version of Form 1040, U.S. Individual Income Tax Return for 2020 (downloads as a PDF). There are several notable changes to the form proposed for the tax year 2020 – the tax return that you’ll file in 2021.

Page One

Identifying information. There are no real changes to the identification portion of the Form 1040: this is where you list your name, address, Social Security Number (or ITIN) and note your filing status.

Virtual currency. As expected, a question about virtual currency remains on the front of the Form 1040. A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income. Schedule 1 is used to report income or adjustments to income that can’t be entered directly on the front page of form 1040.

I noted last year that the IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2015, the number fell to 802. This, despite a clear uptick in cryptocurrency use and trading. The IRS has made cryptocurrency compliance one of its target issues for the 2021 year, so expect this box to get a lot of scrutiny.

Standard Deductions and Dependents. This routine information and the layout remain the same (only the numbers for the standard deduction have changed: you can find those here).

Charitable contributions. As a result of theCARES Act, charitable cash contributions of up to $300 are temporarily above-the-line deductions. That means that you do not have to itemize your deductions to deduct your charitable contribution. And yes, the $300 limit is per return, so a married couple can only deduct a total of $300.

Income items. Outside of the adjustments to income, there isn’t much difference in income reconciliation. We’ll just have to get used to yet another line number for taxable income (it’s now line 15). 

Page Two

Tax, Credits, and Deductions. One thing that jumps out immediately is that the “Federal income tax withheld from Forms W-2 and 1099” line has now been divided into separate lines (lines 25(a)-(c)) for withholding for Forms W-2, 1099, and “other forms.” This suggests an increased level of scrutiny for the self-employed and gig workers.

And keep in mind that there’s a new Form 1099 in town: Form 1099-NEC, Non-employee Compensation, will replace Form 1099-MISC for gig workers and independent contractors. You can find out more here.

You’ll also post any estimated tax payments and amounts carried forward from last year’s return (if any) on line 26. This is new and much more simple: previously, estimated tax payments were lumped in together on line 18 after you figured the amounts on Schedule 3.

Stimulus Checks. There is a separate reconciliation schedule for stimulus checks that will carry over to page two of your Form 1040. You’ll see it on line 30: Recovery rebate credit. If you didn’t receive the correct amount in your stimulus check in 2019 (for example, you made too much money in 2019 or you had a child in 2020), you’ll make those adjustments on line 30.

The instructions will include a worksheet that you can use to figure what you’re owed. The maximum credit is $1,200 ($2,400 if married filing jointly) plus $500 for each qualifying child. The instructions aren’t out just yet, but you can get a sense of what you’ll need to know by checking out the draft instructions.

Refunds. Outside of some renumbering, the refund sections have not changed.

Amount You Owe. Usually, figuring the amount you owe is pretty simple: it’s tax due less credits and payments. But there’s a new line for 2020 which notes: Schedule H and Schedule SE filers, line 37 may not represent all of the taxes you owe for 2020. See Schedule 3, line 12e, and its instructions for details. 

And yes, Schedule 3, line 12e, is new. It says: Deferral for certain Schedule H or SE filers (see instructions) That deferral? Under the CARES Act, employers may defer the deposit and payment of the employer’s portion of Social Security taxes. The deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020, with half being due on December 31, 2021, and the remainder due on December 31, 2022. What does that have to do with Form 1040? The relief also applies to self-employed persons. 

Other Information

IP PIN. The spot for an IP PIN isn’t new but more taxpayers may be paying attention this year since there’s an opportunity to opt-in.

Numbered and Lettered Schedules. Form 1040 still has lettered schedules (like Schedule A, Itemized deductions) and numbered schedules (like Schedule 1, Additional Income and Adjustments To Income).

New Schedule LEP. There is a new schedule: Schedule LEP, Request for Change in Language Preference. Schedule LEP allows taxpayers to state a preference to receive written communications from the IRS in a language other than English. The draft instructions suggest that you can choose from 20 languages, including French, Spanish, Japanese, and Farsi.

Form 1040-SR. For 2020, if you were born before January 2, 1956, you have the option to use Form 1040-SR, U.S. Tax Return for Seniors (downloads as PDF).

Expect more information as IRS continues to update forms for what promises to be an interesting tax season!

Employers must file Form W-2 and other wage statements by February 1 in 2021 to avoid penalties.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) that was enacted on December 18, 2015, made several changes to the way we file taxes. Now, employers file copies of Form W-2, Wage and Tax Statements, and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration by January 31. That is also the date the Forms W-2 are due to employees.

However, in 2021, January 31 falls on a Sunday. By law, that means that they are instead due on the next business day, which is Monday, February 1.

In addition, some Forms 1099-MISC, Miscellaneous Income, and the newly re-introduced Form 1099-NEC, Nonemployee Compensation (more on that here), are also normally due to taxpayers on January 31, but in 2021, they will be due on the next business day, February 1, 2021.

No Automatic Extensions Available

Automatic extensions of time to file Forms W-2 are not available. The IRS will only grant extensions for very specific reasons (check the instructions for Form 8809, Application for Time to File Information Returns).

More Due Dates Coming

As I do every year, I’ll post a chart of upcoming due dates for the new tax year. Keep watching this space!

The Internal Revenue Service (IRS) has issued final regulations relating to section 1031 like-kind exchanges.

1031 Like-Kind Requirements

We call them 1031 like-kind exchanges because the rules are found at section 1031 of the Tax Code (clever, I know). The provision allows you to defer tax on gain if – and it’s a big if – you participate in a qualifying like-kind exchange that meets some pretty specific requirements:

  • The property to be exchanged must have been held for productive use in a trade or business or for investment (and must be exchanged for a property similarly held). Personal residences or vacation homes for personal use won’t qualify.
  • The property doesn’t have to be real estate (though it typically is). It cannot be: stock in trade or other property held primarily for sale; stocks, bonds, or notes; other securities or evidences of indebtedness or interest; interests in a partnership; certificates of trust or beneficial interests; or choses in action (but see below changes under the TCJA).
  • The exchange does not have to be exclusively for like-kind property. It can include like-kind property and other sources of compensation such as cash. However, to the extent that you receive property that doesn’t qualify as like-kind, you may trigger some taxable gain (in other words, you can have gain and deferral in the same year).
  • The properties must be similar. Generally, that means that it needs to be of the same nature, character or class (real estate to real estate, for example). The rules for personal property exchange are a bit more restrictive (my favorite example of this is that livestock of different sexes are not property of a like-kind).
  • The property to be exchanged must be clearly identified within 45 days from the date you sell the original property.
  • The deal must be completed (meaning you have to be in control of the replacement property) no later than 180 days after the earlier of the original sale or the due date of the income tax return for the tax year in which the original property was sold.

Some tricky rules and restrictions apply to basis and other limitations. You can find out more here.

Changes Under The TCJA

The rules have been settled for awhile, but the Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment to exchanges of real property.

Specifically, as of January 1, 2018, exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify as tax-deferred like-kind exchanges. Also, like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment. That means that exchange of real property held primarily for sale (common in real estate heavy businesses) does not qualify as a like-kind exchange.

IRS 2020 Final Regulations

Under the final regulations, real property includes land and generally anything permanently built on or attached to land. That would include, for example, permanently affixed items such as gas lines, cooling units, and piping (without regard to whether those items comprise part of an income-generating structure). The rule is that machinery and equipment will be characterized as real property if they comprise an inherently permanent structure, a structural component, or are real property under the State or local law test.

It also generally means property that is characterized as real property under applicable state or local law. An example in the regulations included “shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) [of the Code]if at the time of the exchange such shares have been recognized by the highest court or statute of the State in which the company is organized as constituting or representing real property or an interest in real property.” That language was originally included in a Conference Report and the premise – to include property characterized as real property under state and local law – incorporated into the regulations.

And, now, certain intangible property related to real property, such as leaseholds or easements, qualifies as real property under section 1031.

Form 8824, Like-Kind Exchanges

As before, to report a like-kind exchange, taxpayers must file Form 8824, Like-Kind Exchanges, with your tax return for the year you transfer property as part of a like-kind exchange. The final regulations do not change the due date or reporting information.

You can download the final regulations here.

Last year, the Internal Revenue Service introduced a draft version of a form that we haven’t seen since 1982: Form 1099-NEC, Nonemployee Compensation. Form 1099-NEC is intended to replace the nonemployee compensation part of a form many of us have come to know and love: Form 1099-MISC, Miscellaneous Income.

Form 1099-MISC is sticking around for other things, like reporting gross proceeds to an attorney, Section 409A deferrals, and nonqualified deferred compensation income. But nonemployee compensation – money paid to freelancers, independent contractors, gig workers, and others that aren’t employees – will now be reported on Form 1099-NEC.

Who Gets A Form 1099-NEC?

The IRS says that trades or businesses need to issue Form 1099-NEC if the following four conditions are met:

  1. You made the payment to someone who is not your employee.
  2. You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
  3. You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
  4. You made payments to the payee of at least $600 during the year.

Making The Change

Why is the form 1099-NEC being (re)introduced? The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) enacted on December 18, 2015, made several changes to the way we file taxes. Notably, section 201 of the PATH Act of required taxpayers who claimed the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) to wait until mid-February before they could receive their tax refunds.

Of course, taxpayers who claim the EITC and/or the ACTC must have earned wages, typically reported on Form W-2 or – until now – a Form 1099-MISC. Employers were required to furnish those forms to taxpayers by January 31. However, employers could wait until the end of February, if filing on paper, or the end of March, if filing electronically, to submit these forms to the government. That means that taxpayers who filed early could get tax refunds even before the IRS received the related forms from the employers. The result? Room for fraud. Scammers and thieves could file bogus tax returns weeks before the IRS had any chance to confirm wage information. That’s why the agency started holding onto the checks a little longer.

The PATH Act also required employers to submit forms W-2 and forms 1099-MISC to the Social Security Administration (SSA) on January 31, the same date that taxpayers receive their documents. By pushing out the tax refund issue date to February 15, the IRS has time to match up the employer forms with the taxpayer forms. Problem solved, right? Not exactly. The PATH Act didn’t change the due dates for all forms 1099-MISC. Remember – it’s a catch-all form. The due date for certain Forms 1099-MISC was January 31, while the due date for other forms 1099-MISC was February 15.

That was confusing for employers and taxpayers, and it was no less confusing for IRS systems and employees. The proposed solution was to bring back form 1099-NEC to report nonemployee compensation.

The Slight Hitch

It’s not all smooth sailing. This year, the IRS released its updated Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G. Publication 1220 helps employers and tax professionals understand the specifications for filing certain information forms electronically with the IRS, including the requirements under the Combined Federal/State Filing Program (CF/SF).

(Stay with me, this will all make sense in a moment…)

The CF/SF Program was created to simplify the filing of information returns. As part of the program, the IRS forwards original and corrected information returns filed electronically to participating states free of charge for approved filers. That means that separate reporting to those states is not required.

Information returns that may be filed with the CF/SF Program are:

  • Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
  • Form 1099-DIV, Dividends and Distributions
  • Form 1099-G, Certain Government Payments
  • Form 1099-INT, Interest Income
  • Form 1099-K, Payment Card and Third Party Network Transactions
  • Form 1099-MISC, Miscellaneous Income
  • Form 1099-OID, Original Issue Discount
  • Form 1099-PATR, Taxable Distributions Received From Cooperatives
  • Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
  • Form 5498, IRA Contribution Information

Um. It includes Form 1099-MISC,but where is Form 1099-NEC? That’s right. For now, Form 1099-NEC is not included in the CF/SF Program for 2020. That means that Forms 1099-NEC will have to be filed separately for state purposes.

This is important information for some taxpayers who might have relied on the CF/SF Program in the past to forward Form 1099-MISC for nonemployees. For 2021, you’ll have to make other arrangements for the new forms.

You May Still Need To File Form 1099-MISC

Also important to know? Even though beginning with tax year 2020, you’ll use new Form 1099-NEC to report nonemployee compensation, you should not report prior-year nonemployee compensation on Form 1099-NEC. If you need to issue a form to report prior-year nonemployee compensation – for example, you realize that you forgot to report a 2019 payment – you’ll need to use a prior-year Form 1099-MISC. Got it?

The Round-Up

Usually, these kinds of technical changes are reserved for the tax professionals and tax geeks among us. But these changes will also impact businesses who work with independent contractors and freelancers.

And independent contractors and freelancers? You need to know this information, too, so you’ll know which form to look out for (Form 1099-NEC) and when (by January 31 in most years, but in 2021, it will be February 1).

The IRS will provide more information about filing requirements for next year (2021) as 2020 draws to a close. Stay tuned!

The Internal Revenue Service (IRS) has announced that it will allow the use of E-signatures on certain tax forms that cannot be filed electronically. This is a temporary move intended to reduce in-person contact and lessen the risk to taxpayers and tax professionals during COVID.

What does that mean? Well, some forms, like Form 1040, U.S. Individual Income Tax Return, are already set up to allow e-signatures when filed electronically. More than 90% of Form 1040s are filed electronically.

But others, like Form 3115, are not: they’re intended to be signed on paper. Forcing tax professionals and taxpayers to sign by paper – and then asking the IRS to process that paper – just isn’t practical right now. As a result, the IRS is taking these temporary steps.

“We take the health and safety of the nation’s taxpayers, the tax professional community and our employees very seriously,” said IRS Commissioner Chuck Rettig. “Expanding the use of digital signatures is an important step during COVID-19 to help tax professionals. We understand the importance of digital signatures to the tax community, and we will continue to review our processes to determine where long-term actions can help reduce burden for the tax community, while appropriately balancing that with critical security and protection against identity theft and fraud.”

So, which forms can you sign digitally (for now)?

For now, the following forms can be submitted with digital signatures:

  • Form 3115, Application for Change in Accounting Method;
  • Form 8832, Entity Classification Election;
  • Form 8802, Application for U.S. Residency Certification;
  • Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
  • Form 1120-RIC, U.S. Income Tax Return For Regulated Investment Companies;
  • Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
  • Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
  • Form 1120-L, U.S. Life Insurance Company Income Tax Return;
  • Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
  • Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms.

This is a temporary measure and applies to those tax forms that are signed and postmarked beginning on or after August 28, 2020, through December 31, 2020. The IRS plans to monitor the submissions and determine if additional steps are needed.

And if you’re wondering whether you have to use a specific brand or type of e-signature, the answer is no. According to an IRS memorandum, electronic and digital signatures may be created by many different technologies and they are not specifying a particular technology for this purpose.

The Internal Revenue Service (IRS) has released a draft of Form 1040, U.S. Individual Income Tax Return. There are several notable changes to the form proposed for the tax year 2020 – the tax return that you’ll file in 2021. And… postcard-sized, it’s not. Let’s dive right in.

Virtual currency. At first blush, the top of the return doesn’t look much different from the 2019 tax return with one rather interesting exception: the virtual currency question’s placement. A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income (downloads as a PDF). Schedule 1 is used to report income or adjustments to income that can’t be entered directly on the front page of form 1040.

I noted last year that the IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

You may recall that I wasn’t a fan of the location since taxpayers who don’t have to file Schedule 1 for any other purpose may not be aware that they need to file Schedule 1 to answer to this question if it applies to them. Yes, tax software interviews will likely catch it – but what if they don’t? Or what if taxpayers are completing the form by hand? Or if tax preparers don’t think to ask? I said at the time that “I think it’s something that IRS will need to address.” Clearly, they did.

I also noted at the time that:

It’s clear that the IRS is getting serious about cryptocurrency reporting.

I think the new placement of the virtual currency question signals – even more than before – that the IRS is taking action.

Standard Deductions and Dependents. Largely nothing to see here. The information requested and the layout remain mostly the same.

Charitable contributions. Typically, you don’t see reference to charitable contributions until Schedule A. However, due to the CARES Act, charitable cash contributions of up to $300 are temporarily above-the-line deductions. That means that you do not have to itemize to claim those deductions – something that many taxpayers have grappled with because of the increased standard deduction under the Tax Cuts and Jobs Act (TCJA).

Income items. Outside of the adjustments to income, there isn’t much difference in income reconciliation. We’ll just have to get used to yet another line number for taxable income (tentatively line 15). 

Tax, Credits, and Deductions. Page two of your Form 1040 – where you figure your tax, withholding, and what you actually owe (or are due a refund) is where many changes are for 2020. One thing that jumps out immediately is that the trusty “Federal income tax withheld from Forms W-2 and 1099” line has been divided into separate lines for withholding for Forms W-2, 1099, and “other.” This suggests an increased level of scrutiny for the self-employed and gig workers (I could be wrong).

Stimulus Checks. We’ve been talking about it for a bit, but now we get to see how the stimulus checks will be reported. There is a separate reconciliation schedule that will carry over to page two of your Form 1040. The draft notes “see instructions” for specifics – but those instructions aren’t out just yet.

Refunds. Outside of some renumbering, the refund sections have not changed.

Amount You Owe. Usually, figuring the amount you owe is pretty simple: it’s tax due less credits and payments. But there’s a new line for 2020 which notes: Schedule H and Schedule SE filers, line 37 may not represent all of the taxes you owe for 2020. See Schedule 3, line 12e, and its instructions for details. 

And yes, Schedule 3, line 12e, is new. It says: Deferral for certain Schedule H or SE filers (see instructions) That deferral? Under the CARES Act, employers may defer the deposit and payment of the employer’s portion of Social Security taxes. The deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020, with half being due on December 31, 2021, and the remainder due on December 31, 2022. What does that have to do with Form 1040? The relief also applies to self-employed persons. 

There are more changes to come since the IRS just released a slew of draft returns, but this gives you a sense of the direction things are heading (spoiler alert: more complicated, not less).

A cautionary note: This is a draft return, and not yet the real thing. That means, reminds the IRS, “Do not file draft forms and do not rely on draft forms, instructions, and publications for filing.” The IRS cautions that “unexpected issues occasionally arise, or legislation is passed” which means that this form could look a lot different in the final version that it does now. Things could change – and if we’ve learned anything from 2020, it’s that they probably will.

After weeks of waiting, tax professionals and taxpayers finally got the word from the Internal Revenue Service (IRS): amended returns can now be electronically filed.

In May, the IRS had given notice that later this summer, taxpayers would be able to file Form 1040-X, Amended U.S Individual Income Tax Return electronically.

Before this year, you could only amend your tax return by paper. At the best of times, that could mean a six-to-eight week wait for processing. And these are not the best of times. With a backlog of mail and some offices closed due to the pandemic, processing times are extremely lengthy.

Taxpayers and tax professionals have – for years – hoped that the IRS would allow for e-filing amended returns. According to the IRS, making the 1040-X an electronically filed form has been the agency’s goal for years. It has also been a continuing recommendation from the Internal Revenue Service Advisory Council (IRSAC) and the Electronic Tax Administration Advisory Committee (ETAAC). Now, it’s finally happening: you can submit Form 1040-X electronically with commercial tax-filing software.

“The ability to file the Form 1040-X electronically has been an important long-term goal of the IRS e-file initiative for many years,” said Sunita Lough, IRS Deputy Commissioner for Services and Enforcement. “Given the details needed on the form, there have been numerous challenges to add this form to the e-file family. Our IT and business operation teams worked hard with the nation’s tax industry to make this change possible. This is another success for IRS modernization efforts. The addition helps taxpayers have a quicker, easier way to file amended returns, and it streamlines work for the IRS and the entire tax community.”

Since the tax-filing software allows users to input their data in a question-answer format, it simplifies the process. According to the IRS, it also makes it easier for IRS employees to answer taxpayer questions since the data is entered electronically and submitted to the agency almost simultaneously.

“Adding the 1040-X to the e-filing portfolio provides a better experience for the taxpayer, all around. It makes submitting an amended return easier and it allows our employees to process it in a more efficient way,” said Ken Corbin, the IRS Wage and Investment commissioner and head of the division responsible for processing these returns.

But don’t get too excited. So far, you can only file electronically for amended returns for the tax year 2019 Forms 1040 and 1040-SR returns. More years and “additional improvements” are planned for the future.

If you don’t want to file electronically, you don’t have to: you still can submit a paper version of the Form 1040-X. Those filing their Form 1040-X electronically and on paper can use the “Where’s My Amended Return?” online tool to check their amended return status.

It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

V is for Voluntary Withholding.

You already know that if you expect to owe tax at tax time, you should make estimated tax payments. But there’s an additional way that you can pay the government so that you don’t have to write a big check at the end: you can choose to have voluntary withholding from your benefits during the year. This is similar to withholding on your paycheck and means that you should owe less at tax time (or preserve your refund if you’re entitled to one).

Why might you owe? You might be receiving unemployment compensation (yes, it’s taxable), Social security benefit along with other income, Social security equivalent Tier 1 railroad retirement benefits, Commodity Credit Corporation loans, certain crop disaster payments under the Agricultural Act of 1949 or under Title II of the Disaster Assistance Act of 1988, or dividends and other distributions from Alaska Native Corporations to its shareholders. If you’re not certain whether your payment is eligible for voluntary withholding, just ask.

To request voluntary withholding, use Form W-4V (downloads as a PDF) to ask the payer to withhold federal income tax. It’s a very simple form. It looks like this:

W-4v

Just complete the personal information and tick the box that indicates the percentage you want to have withheld. There are limits on how much you can withhold. For unemployment compensation, the payer is permitted to withhold 10% from each payment. For any other government payment listed above, you may choose to have the payer withhold federal income tax of 7%, 10%, 12%, or 22% from each payment. There are no other options.

You should ask your payer when income tax withholding will begin. It will continue until you change or stop it, or if your payments stop.

You can find the rest of the series here:

It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

U is for Undue Hardship.

If you’d read any posts on extensions – like this one – you are aware that filing for an extension is generally an extension of the time to file, and not the time to file. It’s almost the extension mantra.

But did you know that there actually is an extension available for payments – but there’s a pretty high bar.

First things first. The form is Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship (downloads as a PDF). It’s used to request an extension of time under section 6161 for payment of the tax shown on your return or an amount determined as a deficiency (an amount you owe after an examination of your return). It’s not meant to be a substitute for a regular extension or to set up an installment agreement.

You can file Form 1127 if you will owe any of the following, and paying the tax when it is due will cause an undue hardship. 

  • Income taxes
  • Self-employment income taxes
  • Withheld taxes on nonresident aliens and foreign corporations
  • Taxes on private foundations and certain other tax-exempt organizations
  • Taxes on qualified investment entities
  • Taxes on greenmail (popular in the 1980s but not so much now)
  • Taxes on structured settlement factoring transactions
  • Gift taxes (but not estate taxes)

Form 1127 can also be filed if you receive a notice and demand for payment (or tax bill) for any of the following if paying them at the time they are due will cause undue hardship: 

  • Normal taxes and surtaxes
  • Taxes on private foundations and certain other tax-exempt organizations
  • Taxes on qualified investments
  • Gift taxes

But here’s the key. You can only use the form if you can prove undue hardship. “Undue hardship” means more than an inconvenience: you must show that you would sustain a substantial financial loss if required to pay a tax or deficiency on the due date. The mere inability to pay does not ordinarily result in penalty relief. Under Treas. Reg. 301.6651–1(c), you must also show that you exercised ordinary business care and prudence for the liability. The IRS will look at all of the facts and circumstances, including your financial situation, and the amount and nature of your spending compared to your income. The IRS will consider whether you made reasonable efforts to conserve sufficient assets in a marketable form (you can’t have converted them to illiquid assets or restricted them in some way) and still could not pay all or part of your tax when it came due.

But you know how I noted earlier that an extension to file isn’t an extension to pay? The reverse is also true: undue hardship generally does not affect your ability to file. You can substitute this form for an extension to file (and it usually doesn’t provide a basis for penalty relief in a failure to file situation). 

You should file Form 1127 as soon as you know of a tax liability or a tax deficiency that you cannot pay. If the liability is for an upcoming return, file on or before the due date of that return, not including extensions. If you are requesting an extension of time to pay an amount determined as a deficiency, file on or before the due date for payment indicated in the tax bill. 

Typically, the IRS won’t give you more than six additional months to pay the tax shown on a return. However, other than taxes due under sections 4981 (excise tax on undistributed income of real estate investment trusts), 4982 (excise tax on undistributed income of regulated investment companies), and 5881 (greenmail), you may be granted an extension for more than six months if you are out of the country. And you must pay the tax before the extension runs out: do not wait to receive a bill from the IRS.

You can find the rest of the series here:

Skip to content