Love Letter from the IRS? Don’t Panic!

Are you one of the lucky tens of thousands of American taxpayers who received a letter in error from the IRS?  If so, don’t panic!  According to Richard Neal (House Ways and Means Committee chairman, D-Mass), there were roughly 12 million pieces of unopened mail in IRS offices across the country.  This was the result of many IRS workers working from home during the pandemic.  In those enormous piles of mail are paper tax returns, correspondence, and (you guessed it!) tax payments.

The IRS has started sending out letters to address unpaid balances.  The problem is that many of those tax payments were mailed, they just remain unopened.  As taxpayers receive these letters, they panic.  However, there is no need to panic!  If you mailed a check to the IRS the first thing you should do is check your bank account.  Has the payment cleared?  If not, then there is nothing for you to do but wait.  Clarification letters are being sent out as payments are processed.  If your check has cleared and you still received the letter, we recommend calling the IRS to discuss the payment with a representative.  It may be a clerical error or the letter may have been sent before the payment was processed.

Have you received a letter from the GA Department of Revenue or another state’s taxing authority?  The first step is to call and request an explanation of the penalty.  There are two likely causes:

  1. Your payment was received after the typical April 15th deadline but before the July 15th deadline.  If the state’s system was not updated to recognize the new filing deadline this year, you may have been assessed a penalty even though your payment was not late.
  2. You had a sizeable balance due and are being penalized for failure to make estimated payments.

Why would you be penalized for not making estimated payments?  Remember that our tax system is a pay-as-you go system meaning tax is due when it is earned.  This is why W-2 employees have taxes withheld from each paycheck.  If your balance due at filing is greater than $1,000, both the IRS and state taxing authorities reserve the right to calculate a penalty for failure to make estimated payments.  For more information on estimated payments, check out our previous blog post.

Were you owed a refund that you have not yet received?  The IRS has announced that it will pay refund interest on any return filed before the July 15th deadline and that interest will be calculated from April 15th.

Recovery Rebates (aka Stimulus Payments) Explained

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress approved a stimulus payment plan that may provide direct cash payments to taxpayers. The stimulus payments are considered advanced rebates of a refundable credit against taxpayer’s 2020 tax return. The recovery rebate advance amounts have been quoted as differing amounts, but we’ll try to explain how much taxpayers can expect to receive. While there are many moving parts related to the recovery advances, we know for sure the maximum amounts that taxpayers can expect to receive.

The refundable credit per taxpayer over the age of 17 that is not claimed as a dependent is up to $1,200. This means that a married couple can receive up to $2,400. In addition to the taxpayer amount, a rebate of up to $500 per child under the age of 17 is provided for in the bill. In other words, married taxpayers with 3 children can receive up to $3,900. However, take note that I’ve used the term “up to” quite a bit already. This is because the bill was written to phase out the rebates based on taxpayers adjusted gross income. The limitation is based on the AGI claimed on the most recently filed tax return, which will be the 2019 tax return for most taxpayers. Note, adjusted gross income is used as the basis for calculating the recovery rebates, not gross income.

As mentioned before, the mechanics of the rebate are going to be challenging. First, the payment is going to be made based on your 2018 or 2019 tax return (whichever was most recently filed). However, whether the payment is tax free, somewhat taxable, or wholly taxable is going to be dependent on your 2020 tax return. This means that the amount being paid directly to taxpayers could be subject to tax if 2020 adjusted gross income is over the credit thresholds. Now, let’s get into the actual numbers of the bill.

Remember, the payment is up to $1,200 per eligible taxpayer, and $500 per qualifying child. The AGI phase-outs begin at the following thresholds:

  • Married Filings Jointly: $150,000
  • Head of Household: $112,500
  • All Other Filers: $75,000

Additionally, AGI over the threshold amount will start reducing your payments. The reduction amount is $5 for every $100 over the applicable threshold.

The first step in the process is to calculate the max household payment. Let’s use a married couple, filing jointly, with 2 kids as an example. Their payment would be up to $3,400 (1200 + 1200 + 500 + 500).  However, taking into account the fact that the AGI on their most recently filed return is $175,000, we realize that their stimulus amount will be reduced because the phase-out begins at $150,000. In this case, we would reduce the payment by $1,250 (25000 x .05). This couple’s total recovery rebate would be $2,150.

Let’s break down the math:

Married filing jointly = $1,200 per taxpayer or $2,400 total

2 kids under the age of 17 = $500 per child or $1,000 total

AGI over phase-out = $175,000 – $150,000 = $25,000

AGI-based reduction of rebate = [25,000 x .05]   OR  [(25,000 / 100) x 5]

So….  (2400 + 1000) – (25000 x .05) = $2150

Let’s look at another example. A single taxpayer without any children and an AGI of $60,000 would expect to receive up to $1,200.  The threshold for single filers is $75,000.  Because their AGI is below the threshold, they should expect to receive the full $1,200.

Here’s one more example.  A single taxpayer with a 16 year old child.  This person would expect to receive a rebate of $1700 ($1200 + $500).  With an AGI of $80,000, they are over the single filer limit.  However, there is a higher limit for head of household filers ($112,500) so they should expect to receive the full $1,700.  If we use this same example and the taxpayer has an AGI of $115,000 on their most recent tax return, they would receive a reduced rebate.  In this case, the total amount received would be $1,575.

$115,000 – $112,500 = $2,500

$2,500 x .05 = $125 (reduction)

$1,700 – $125 = $1,575

Simply put, the rebate is going to be based on your filing status plus the number of children you claim under the age of 17. Any AGI over the applicable threshold will reduce the total payment by 5% of the applicable overage.

How do I find my AGI?

Want to calculate your own payment?  The first thing you’ll need is the AGI from your most recently filed tax return (2018 or 2019). While each form is different, AGI can be seen on line 8b of the 2019 Form 1040.  Just remember that AGI may be listed on a different line if you’re not utilizing form 1040.

When can I expect my refund? And where are they going to send the check?

Rebates are expected to be sent out, according to the US Treasury, within the next three weeks. Checks will be sent to the last known address (i.e. the address on your most recent tax return) or via direct deposit. If you haven’t setup direct deposit, or the information is no longer valid, the Treasury has developed a website that allows you to enter your direct deposit details for faster receipt.

I want to issue a word of warning about utilizing the Treasury’s websites. There are going to be a number of scammers and hackers taking advantage of this situation. Please, please, please be careful about what you’re doing with your personal information. Remember, the IRS will NEVER call or email and ask for your personal information. Also remember to check the website you’re using as it could be a fake site. We’ll post the correct site once it is made available.

What happens if I’m not eligible for the rebate based on my 2018 or 2019 tax return?

Since this is an advance on the recovery rebate, taxpayers who are ineligible based on their 2018 or 2019 income and who see a reduction in income in 2020, may receive the rebate as part of their 2020 return.

What happens if I receive a rebate that I wouldn’t qualify for based on my 2020 income?

While 2020 is expected to be a year of reduced incomes, some fortunate individuals may actually see their incomes rise. In this case, if those individuals receive an advance recovery rebate for 2019 that they wouldn’t otherwise qualify for based on 2020 income, then they’ll report that on their tax return. However, as of the passing of the bill, there is no claw back provision in the law that would suggest that the Treasury will recoup an overpayment. This means that even if an overpayment is calculated, you won’t have to “repay” it with your 2020 return.  Please note that this could be subject to change.

 

Looking for more information about the CARES Act?  Check out our blog post on Student Loan Forgiveness and the Expansion of Unemployment Under the CARES Act.

Tax Season 2019: Important Dates and Deadlines

Tax season is here!  The IRS has announced that they will begin accepting electronically filed and paper returns for TY 2019 beginning January 27th.  Generally, most states follow the IRS’s schedule and will begin accepting electronic returns on the same day.  Even though we’re still a few weeks away from filing returns, you don’t have to wait until the 27th to submit your tax documents to us.  In fact, it would make our day if you got things to us early!  We will go ahead and prepare your state and federal returns and hold them in our system until efile opens on the 27th.

When deciding how to file your return, keep in mind that electronic filing is the fastest and most secure option.  Not only does it drastically speed up processing time, but it also better protects your personal data. The same is true for direct deposit: DD refunds are processed much more quickly than paper checks and the risk of interception (a common tax season scam) is eliminated.  At Levesque & Associates, we always file returns electronically if it’s allowable (there are some situations which require paper filing) and we always encourage clients to take advantage of direct deposit for refunds.

Remember, the personal filing deadline will be April 15th, which falls on a Wednesday this year.

Other deadlines:

  • 4th quarter 2019 estimated payments – January 15
  • 1099s and W-2s – January 31
  • Partnerships and S-Corps – March 16 (the 15th is a Sunday)
  • Trusts, Estates, and C-Corps – April 15
  • Non-profits – May 15

Extension deadlines:

  • Partnerships and S-Corps – September 15
  • Personal, Trusts, Estates, and C-Corps – October 15
  • Non-profits – November 16 (the 15th is a Sunday)

 

Important Reminder: if you cannot file your return by the deadline, be sure to file an extension.  The penalties for not filing can be very high.  Additionally, if you are not able to pay your balance due, you should still file your return.  The penalties on late payment are not as steep as those on failure to file.

 

Learn more about managing your balance due and available payment plan options in our previous blog post, “Struggling with Tax Debt?  Here are Some Tips.”

 

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