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How Your Clients Could Still Get Refunds from 2018 Filings

What you need to be doing today is discuss with clients whether it makes sense to file an amended return to receive a refund of taxes paid for 2018.

Feb 19th 2020
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Amid the myriad of requests tax professionals make at busy season, the most basic is to be able to go in with confidence. As such, AccountingWEB is working with J.K. Lasser to help provide that needed boost of assurance practitioners need most at this crucial time of year.

The Season is fraught with pointed questions, from changes in forms and tax codes to processes and procedures for individuals and businesses. We trust that this article series and additional information from authors Barbara Weltman and Elliot Eiss will lighten the load a bit.

In their latest offering, Weltman and Eiss discuss some of the potential refund opportunities your clients?may yet benefit from by filing an amended return for 2018.

As you may know, the Further Consolidated Appropriations Act, 2020 that was signed into law on December 20, 2019, retroactively reinstated dozens of expired tax breaks. Some of these breaks are for individuals, while others are for businesses.

Elliott Eiss

Elliot Eiss

Extenders to Consider

The new law extended dozens of tax breaks. The following tax breaks for individuals have been retroactively extended to 2018; they apply as well for 2019 and 2020:

  • Exclusion from gross income of income resulting from the cancellation of mortgage up to $2 million on a main home
  • Tuition and fees deduction of up to $2,000 or $4,000 (depending on income) as a deduction from gross income (no itemizing is required)
  • Mortgage insurance premiums treated as home mortgage interest
  • Cash contributions deductible up to adjusted gross income to benefit disaster relief (but only for contributions paid by February 18, 2020 for federally-declared disasters declared by same date)
  • Nonbusiness energy property credit of up to $500 for adding insulation and certain other energy improvements to a main home
  • Tax credit for a 2-wheeled plug-in electric vehicle

The kiddie tax rules have been changed again too. Before 2018, the parents’ top marginal rate was used to compute this tax on a child’s unearned income over a threshold amount.

Then the law was changed to use the rates for trusts and estates, which had the effect of greatly increasing the tax for some children. The new law goes back to the old rules for tax years beginning after December 31, 2019, but an election can be made to apply the change retroactively to 2018 and 2019. Consider electing to use the old rule (the parents’ marginal rate) for 2018 if it results in a lower tax than the tax with the rates for trusts and estates.

The following business-related tax breaks have been retroactively extended to 2018; they apply as well for 2019 and 2020 (or longer where noted):

  • Changes in recovery periods for certain racehorses and motorsports entertainment complexes
  • Expensing of certain TV, movie, and live theatrical productions
  • Empowerment zone tax incentives
  • Various energy-related tax credits (with extensions for biodiesel and renewable diesel tax credits through 2022)
  • Deduction for energy efficient commercial buildings
  • New markets credit
  • Certain employment-related tax credits, including the employee retention credit

Deciding Whether to File an Amended Return

The biggest question that most taxpayers have when it comes to filing an amended return is whether it will increase the risk of being audited. With today’s extremely low audit rates (just 0.59 percent for individuals in the government’s 2018 fiscal year ending September 30, 2018), the risk is low. But with that said, there are no guarantees that a taxpayer who files an amended return won’t become an audit statistic.

Another consideration in deciding on whether to file an amended return is cost for those who use paid preparers. Professional fees for filing an amended return could exceed any potential refund.

How to File an Amended Return

Watch for deadlines. Generally, a claim for a tax refund must file no later than 3 years after the date of filing the original return or within 2 years after the date the tax was paid, whichever is later.

An amended return is submitted on Form 1040X. This form cannot be filed electronically; it must be a paper form. This is so whether the original return was filed on paper or electronically. The IRS has been encouraged by the National Taxpayer Advocate to adopt electronic filing for amended returns, but there’s no indication when this could happen.

When filing for a refund, explain to your clients the substance of the amendment to the return. This may require attaching documentation to help explain or support the nature of the refund claim. For example, if a taxpayer wants to claim the tuition and fees deduction for 2018, a copy of Form 1098-T should be attached to show the tuition that was paid.

Conclusion

When meeting with clients to discuss preparation of the 2019 return, don’t overlook a review of their 2018 return to find possible refund opportunities for them.

J.K. Lasser's Your Income Tax 2020?gives you step-by-step instructions for easy, stress-free filing.
Download the book here.

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