Covid Relief Bill Changes Tax Rules Midseason. What to Know About Filing an Amended Return

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The $1.9 trillion stimulus package that Congress aims to send to President Biden this week may make tax filing even more complex.

For some Americans who have already filed, it may mean they need to amend their return.

Last week, the Senate made changes to the Covid relief bill passed by the House of Representatives that impact tax filing in the middle of the 2020 season. A key update in the bill, which the house passed Wednesday, is a provision that waives taxes on the first $10,200 in unemployment insurance income for individuals who have 2020 adjusted gross income of less than $150,000.

For married couples filing jointly who both had unemployment insurance, the tax-free amount is $20,400, but combined adjusted gross income must still be less than $150,000.

A complex filing season

The policy will shield some families from getting a surprise tax bill. It also adds complexity to an already short tax season — the IRS this year began accepting 2020 returns in February instead of January because it had to send out the last round of stimulus payments.

Through Feb. 26, the IRS had received more than 45 million returns and processed about 39 million, according to the agency. Some people with unemployment income may have already filed to get a refund, or to make sure they'll get future stimulus checks.

That means that once the bill becomes law, those submitted returns will be incorrect and will need to be updated.

In addition, the timing of the bill puts other taxpayers with unemployment income in a difficult situation. Some taxpayers may now be stuck between filing their returns early to get a refund or waiting to make sure they get the benefits from the next Covid bill and possibly stimulus money they need.

A waiting game

For now, experts say that no one should take any immediate action. The House passed the updated version of the bill Wednesday but still needs to be signed into law by Biden, which he's expected to do Friday.

"If you haven't filed a return for 2020 yet, you may just want to wait for this law to pass," said Eric Bronnenkant, a certified public accountant, certified financial planner and head of tax at Betterment.

Once the bill is law, the U.S. Department of the Treasury and the IRS will be tasked with issuing guidance to taxpayers on what to do depending on their situation, something that could take weeks.

If you already filed your 2020 return but had unemployment income and would have benefitted from the new Covid bill, there's a chance the IRS will take care of updating your information and sending you any money owed. If that happens, it would mean those people do not have to take any action to update their tax returns.  

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But it's just as likely that the IRS won't be able to do that, meaning that taxpayers will have to either file a another return to correct the information before April 15 — the current end of the tax season for individuals — or file an amended return after the deadline.

"I seriously doubt they have any ability to track who reported unemployment and paid tax on it and who didn't," said Edward Renn, a partner at Withers law firm. "I don't know that they can fix the problem without the taxpayer getting involved."

Either way, it's best for taxpayers to wait at least a few weeks for more information before filing or trying to revise information they've already submitted to the IRS, said Renn.

How to amend a return

If you do need to file an amended return, the good news is that you can now do it online instead of needing to mail in a paper form.

In 2020, the IRS made the Form 1040-X for amending returns electronic. An electronic Form 1040-X for 2020 is already available online from the IRS. Those who filed through other online tax preparation platforms should check with the provider to see if they offer amended e-filing and have the up-to-date form.

To fill out the form, you need the return you previously filed and know what information needs to be updated.

"The crux of the form shows three columns: original amount, net change and corrected amount," said Susan Allen, CPA, senior manager for tax practice & ethics with the American Institute of CPAs. "The bottom of the first page of Form 1040-X then calculates how much you now owe or how much the IRS now owes you."  

There isn't technically a limit to how many amended returns you can file, although doing more than one could get complicated. And, if the taxpayer can't figure out how to accurately file the amended return on their own, it could become a costly process.

"There is going to be an unnecessary cost to the taxpayers here if they can't figure out how to do it on their own," said Adam Markowitz, enrolled agent with Howard L Markowitz PA CPA in Leesburg, Florida.

And, while some people may be eager to get back extra money they are owed, there isn't a tight deadline for filing an amended return — generally, you have up to three years from the date you filed your original return to send in your amended one and claim a refund.

That means people should take their time getting an amended return together, said Markowitz.

"It's far more important to get this done right than get this done fast," he said.

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