With Congress Still Debating Stimulus, Should You Rush To File Your 2020 Tax Return Or Wait?

As with most things in tax, the answer to the question posed in this headline is “it depends.” Individual returns cannot be e-filed until February 12, 2021, but legislation pending in Congress leaves unanswered questions for both taxpayers and tax practitioners that could affect taxpayers’ 2020 income tax returns.

Economic Impact Payments and the Recovery Rebate Credit

The amount of the first two rounds of economic impact payments (EIP1 and EIP2) was determined by taxpayers’ 2018 or 2019 tax returns, depending on what information was available at the time the payments were issued. These EIPs (popularly known as stimulus checks) were advances on a 2020 tax credit, the Recovery Rebate Credit (RRC). Taxpayers must reconcile the amounts received for EIP1 and EIP2 on their 2020 Form 1040 (Line 30 plus a worksheet) to determine if they received too much in stimulus payments or not enough. Taxpayers who received too much will not be required to repay overpaid amounts; taxpayers who are due additional stimulus money will receive it when they file their 2020 tax returns.

Both houses of Congress recently passed measures that would allow the $1.9 trillion American Rescue Plan to be implemented as part of the annual budget reconciliation process. The bill includes additional Economic Impact Payments of up to $1,400 per taxpayer (EIP3). An amendment to the bill indicate Congress wants lower income limits for receiving the payments, but did not specify at what level payments would begin to be phased out. Assuming the bill passes, which looks likely, it remains unclear whether EIP3 would need to be included as part of the Recovery Rebate Credit reconciliation on a taxpayer’s 2020 tax return or on a future 2021 return.

So what to do? In general, the consensus among tax practitioners appears to be to wait to file, at least for a little while longer. Why? Because if EIP3 passes and is required to be reconciled on your 2020 tax return, and that return has already been filed, you will have to amend your return. The IRS, while it is finally up to date on opening mail, is still way behind on processing mail.

Late last year the IRS finally allowed electronic filing of amended returns for tax year 2019— if the original return was also e-filed. At this time it is unclear if e-filing of amended returns will be available for tax year 2020. If not, that means amended 2020 returns must be filed on paper. The IRS is still working through a backlog of paper filed 2019 tax returns. Their most recent information indicates that as of December 25, 2020 they still had approximately 6.9 million unprocessed returns. Amended 2020 returns (not to mention paper filed 2020 tax returns) will simply add to this backlog. Additionally, most paid preparers charge for filing amended returns and may not be able (or willing) to file them until after the 2021 filing season ends.

The only reason not to wait would be if your 2020 income is lower than in 2019—if it’s higher, that is another reason to wait. As I mentioned above, right now the current legislation has an amendment that introduces means testing for receiving EIP3 but does not specify a threshold beyond which a taxpayer would be ineligible for EIP3. If you file your 2020 return with higher income and EIP3 is based on your 2020 income then you could receive a reduced payment or no payment at all. Both of the prior payments started phasing out at $75,000 for single filers and $150,000 for joint filers. Nevertheless, until the law actually passes there is no way of knowing what the phase out thresholds will be (or if the threshold will be a cliff beyond which your payment is eliminated rather than gradually phased out).

More Reasons To Wait

While the amount of an advance payment (EIP1 or EIP2) could not be used to offset back taxes, when you reconcile the amount on your 2020 tax return any overpayment can be used to offset your current balance due or back taxes. The National Taxpayer Advocate has said that this is unfair. It is unfair, but it’s a consequence of the difference between an advance payment of the credit and how tax credits work on a tax return. And, with filing season already here, the IRS simply does not have the time or the resources to reprogram their systems to address the inequity even assuming they wanted to do so. They could, however, be told to do so by Congress although at this time that looks unlikely.

Also looking possible but unlikely is the passage of the Coronavirus Unemployment Benefits Tax Relief Act introduced a few days ago by Senator Dick Durbin (D-Illinois) and Representative Cindy Axne (D-Iowa). This bill would exempt the first $10,200 of unemployment from federal (but not state) income tax. The bill did not make it into the American Rescue Plan as an amendment, so while this would be a win for taxpayers, it is unlikely to pass before filing season ends on April 15, 2021.

Finally, you may simply not have all of your tax documents in time to file by the regular filing deadline. The deadline for partnerships and S-corporations to file their returns and issue K1s to their partners and shareholders is March 15, 2021. Many practitioners who prepare returns for these clients are indicating that they will be putting most of these returns on extension until September 15, 2021 while they wait for additional guidance concerning Paycheck Protection Plan (PPP) loans and the Employee Retention Credit (ERC) and the interplay between the two. Taxpayers who receive K1s from partnerships or S-corporations may not have them until well after the April 15, 2021 deadline.

Nevertheless, you may not be able to wait it out. Even the “fast track” budget reconciliation process isn’t exactly fast. Reports are indicating that Congress’ goal is to have something signed by the time unemployment benefits expire on March 14, 2021. That doesn’t leave much time for filing, especially if you use a tax practitioner. Even more so than usual the return filing process has a lot of moving parts. Practitioners are expecting to spend extra time on almost all of their clients’ returns this year to ensure that the clients are receiving all of the benefits to which they are entitled and to ensure all items (unemployment, wages in multiple states, etc.) are reported accurately.

In general, if you are able to wait to file for at least a few weeks after e-filing opens (at least until the end of February or first week in March), that would be prudent especially if recommended by your practitioner. If you do rush to file for income-related or other reasons (e.g., you need your refund now) be aware that it may be necessary to amend your return to receive additional benefits or if additional tax documents arrive after your return is filed. It’s shaping up to be another crazy filing season so be as patient as possible and be kind to your tax practitioner!