During the holiday season in December, Congress passed the Consolidated Budget Appropriations Act of 2020. Included in this Act was a tax package that renewed more than 24 tax provisions through what are known as extenders. An extender makes a tax provision effective retroactively. Some of the extender provisions are rather esoteric, so we’ll only focus on those most applicable to the broader taxpayer base.
Extenders in More Detail
Among the widely applicable extender provisions, there are the following. It’s best to check with your tax professional to see which of the more than two dozen extenders may apply to your personal situation.
- Deducting PMI (private mortgage insurance) if you itemize
- The delusionality of some types of tuition and fees
- The ability to exclude debt forgiveness on a qualified residence
Wait, I Don’t Understand What Happened?
Most people are probably wondering at this point how they can obtain the benefit of these retroactive changes, which were not allowed when they filed their original 2018 tax return. The answer is to file an amended tax return – or Form 1040X.
Taxpayers often need to file an amended return when they receive updated or changed inputs, such as when a brokerage sends a corrected Form 1099. Unlike this situation where the basis of your filing changed due to updated information, with the extenders you’ll only want to file if it’s to your benefit.
But Do I Have to File an Amended Return?
Tax law does not actually require that a taxpayer file an amended return when learning the original return submitted did not reflect the correct amount of tax. The assumption is that it was correct the first time. Amendments are allowed, but they are not mandatory.
If you do choose to file an amended return, you have to adjust everything to reflect the tax law and any changes in the information received. You are not allowed to pick and choose only the favorable difference between the original and amended filing.
OK, But Should I File an Amended Return?
The answer to this question is probably a tax accountant’s favorite – it depends.
The most frequent worry among taxpayers is that filing an amended return will trigger an IRS audit. This fear arises from the fact that generally returns are filed and processed electronically, but all amended returns are processed by live people. The biggest risk here is to not include a full explanation of the changes in the return, including what is different, why it’s changed and the basis for the difference.
Refund or No Refund – Does it Matter?
Another question that often perplexes taxpayers is whether they should file an amended return if doing so will not result in an additional refund. Just because your amended tax return won’t result in a check in your mailbox, there are situations where it’s still to your benefit. One example is if the amended return will increase your capital or passive loss carryforwards.
The Sands of Time
Since amended returns are processed by people and not electronically, the turn-around time is a bit longer than most returns. The IRS says amended tax returns typically take eight to 12 weeks, but it’s often longer.
While you might not have to file an amended return, it could be to your benefit from either the tax extenders, corrected information that arrived after your initial filing or a combination of both. Every taxpayer situation is different, so it’s best to consult us.