New IRS Updates Affecting Individual Taxpayers

Since the American Rescue Plan Act of 2021 (ARPA) was signed by President Biden, there has been a flurry of changes and updates impacting individual taxpayers. Initially, attention was focused on the distribution of the $1,400 economic impact payment and shifted to other issues such as the 2020 tax exemption on certain unemployment benefits. Attention quickly changed when it was announced the IRS would extend the individual tax filing deadline by 32 days to May 17^th. Then it was announced that certain personal protective equipment (PPE) expenses will qualify for a medical deduction. While all welcome news only limited information was available leaving taxpayers with more questions than answers about specific details. The good news is the IRS has issued guidance on how taxes on unemployment will be recalculated (IR-2021-71), claiming the medical deduction for PPE (IR-2021-7) and additional information on the extended filing deadline (IRS Notice 2021-21). To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Extended Filing Deadline

Additional details on the extended individual tax filing deadline were recently published. The IRS Notice clarifies that a taxpayer required to file a 2020 Form 1040, Form 1040-SR, 1040-NR, 1040-PR or has a payment obligation arising from the filing will receive an automatic extension until May 17, 2021. In addition, there will be no penalties, fees or interest associated with delaying payment.

The IRS will automatically postpone until May 17^th the time for taxpayers to make 2020 contributions to retirement plans including IRAs and Roth IRAs, tax-deferred health and education savings plans. In addition, the extension also applies to the time for reporting payment of the 10% additional tax on amounts includible in income from 2020 distributions from IRAs or other retirement saving plans.

Finally, it also applies to claims for credit or refund of federal income tax that otherwise would expire on, or after, April 15, 2021, and before May 17, 2021.  

It is important to note the deadline extension does not apply to estimated tax payments which are still due on April 15. 2021. However, it has been reported that members of Congress have petitioned the IRS to extend that deadline as well.

2020 Unemployment Tax Recalculation

As mentioned above the ARPA allows those who earned less than $150,000 to exclude unemployment compensation up to $20,400, if married filing jointly, and $10,200 for all other eligible taxpayers. Since the change occurred after some had already submitted the 2020 individual return, it was unclear whether an amended return should be filed or how the IRS would handle the change.

In the recently published guidance, the IRS has confirmed they will take steps in the spring and summer to make appropriate changes to affected returns. For those who have already filed, the IRS will make recalculations in two phases based on the exclusion amount. They will start with taxpayers that are eligible for the $10,200 amount and then focus on those eligible for the higher amount. Since the IRS will make the recalculations automatically there is no need to file an amended return. In cases where refunds are due, it is expected the IRS will start issuing them next month and continue throughout the summer.

Medical Deduction for PPE

The IRS also announced that amounts paid for COVID-19 personal protective equipment such as masks, face shields, hand sanitizers, and sanitizing wipes which are not compensated for by insurance are deductible (assuming expenses exceed 7.5% of AGI). It is important to note that since these expenses may be eligible for reimbursement from flexible spending arrangements (FSA), health reimbursement arrangements (HRAs), or health savings accounts (HSAs) if reimbursement is received then the expenses are not eligible.

Contact Us

The 2020 tax filing season has been filled with many unexpected surprises designed to provide additional tax savings and time to file. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.