Congress sets the laws that change the current and future rules around taxes. But some of these changes can also retroactively affect taxes from previous filings. You might be wondering how to file an amended return to take advantage of these changes and whether you should.
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Have you ever filed your tax return and realized after the fact that you made a mistake or found out about new information that would change your return? You probably sat back and immediately asked yourself, "Can I redo my taxes?"
If you've been in this situation, you aren't alone. This is the process for filing an amended tax return and the tax breaks you may be able to take advantage of when you do.
Should I file an amended return?
You should file an amended return if you need to:
- Correct an error or omission to your income
- Change your filing status
- Change your deductions
- Claim or correct a tax credit
Don't underestimate the benefits of filing an amended return, either. By making sure your tax return is accurate, you can maximize your refund or lower what you owe. You'll also reduce the risk of receiving a notice or IRS audit in the future.
Tax changes in 2019, 2020, and 2021
Recent tax changes include the following:
- Alimony: Previously, the IRS allowed individuals paying alimony to deduct this from their taxable income while those receiving alimony counted it as part of their taxable income. Tax reform changed this rule effective for any alimony agreements entered into after December 31, 2018.
- Shared-responsibility payment: This payment, also known as the individual mandate under the Affordable Care Act, has been eliminated.
- The 7.5% deduction: Congress passed an extenders bill in 2019 that made the 7.5% deduction floor apply for 2019 tax year returns as well. In December of 2020, the Consolidated Appropriations Act (CAA) made this 7.5% threshold permanent.
- The standard deduction: The standard deduction increased in 2021 to account for inflation. For most filers the amounts are:
- Single and married filing separately filers: $12,550
- Married couples filing jointly: $25,100
- Head of household filers: $18,800
- Retirement savings limits: The retirement savings limits for certain accounts are $19,500 for 401(k) plans for 2020 and 2021, up from $19,000 in 2019.
- Required minimum distributions (RMDs): RMDs were temporarily suspended for 2020 only. RMDs are required in 2021. The age at which you have to start RMDs was permanently raised to 72 instead of 70 1/2 after the passage of the SECURE Act.
- Mortgage insurance premiums: These premiums remain deductible for 2021 after the CAA passed at the end of 2020.
- Lifetime Learning Credit: The income phaseouts increased for this credit beginning in 2021:
- Single filers: $80,000 to $90,000
- Married couples: $160,000 to $180,000
- Student loans: The CARES Act allows employers to pay up to $5,250 toward an employee's student loans from 2020 through 2025 without the employee needing to include those payments in their taxable income.
- Renewable energy investment tax credit: The CCA extended this tax credit through 2022 at 26% and 22% through 2023, after which it permanently ends. The residential energy efficiency tax credit was extended through 2021.
- Pass-through deductions: Higher income limits were put in place for pass-through deductions for owners of sole-proprietorships, partnerships, LLCs, and S corporations worth up to 20% of qualified business income. The 2021 amounts begin to phase out at:
- $164,900 for married filing separately and single taxpayers
- $329,800 for married taxpayers filing jointly
- Charitable contributions: You can deduct up to $300 in charitable cash contributions on top of your standard deduction for 2020. This amount increases to $600 for married filing jointly filers in 2021.
- 2021 Stimulus payment: You can receive any stimulus payment you didn't receive in 2021. These payments came from the creation of the Recovery Rebate Credit. The stimulus payments were an advance of a refundable 2021 tax credit that can be claimed on your 2021 tax return if you did not already receive them.
Major tax breaks from tax reform
You pay income and capital gains taxes on any income earned or gains received, respectively. To lower this overall tax liability, Congress has created several tax breaks to entice taxpayers to make certain desirable actions. In doing so, you're able to reduce your tax liability. If you decide to file an amended return, make sure you have a clear understanding of the tax changes, extensions, and credits.
Tax changes in 2018 include:
- Business property
- Child Tax Credit
- Charitable contribution limit
- Corporate income tax rate
- Earned Income Tax Credit
- Estate tax
- Foreign Earned Income Exclusion
- Gambling expenses
- Health and medical savings account contributions
- Home mortgage interest limits
- Income limit on Social Security tax
- Income tax brackets
- Medical expenses deduction (before extension and change)
- Retirement plan contributions
- Standard deduction limits
- State and local taxes
Extension of tax breaks in 2018 include:
- American Opportunity Tax Credit
- Charitable donations from IRAs
- Educator Expense Tax Deduction
- Health insurance premium tax credit
- Lifetime Learning Tax Credit
- Mortgage insurance premiums
- Residential Energy Efficiency Property Tax Credit
- Student loan interest deduction
- Tuition and Fees Deduction
Tax credit added in 2018:
The following have expired:
- Personal and dependent exemptions
- Miscellaneous deductions subject to 2% AGI floor (a few exceptions exist that still allow deductions)
- Income phaseout on itemized deductions
- Moving expenses deduction (limited exception allowed for active-duty military forced to relocate)
- Casualty and theft loss (now only allowed for federally declared disasters)
- Home office deduction for employees
- Automobile mileage rate deductions for unreimbursed employee travel expenses
While most of these changes passed into law at the end of 2017, the majority went into effect in 2018. Due to the impermanent nature of the tax reform bill, all of these changes are set to revert to 2017 law after 2025 with the exception of the corporate tax rate. This change is not set to expire. The rate is 21%, down from 35% seen in 2017 prior to the law passing.
Finally, keep in mind that not every state adopted the new federal tax policies. Some, like California, Texas, Minnesota, North Carolina, South Carolina, and New Hampshire, opted to not change their own laws to be more favorable to residents.
How to file an amended return
To proceed with preparing and filing your amended return, all you need to do is file Form 1040-X, Amended Tax Return, along with the corrected or additional documents you didn't originally file with your return. This will amend your return and give you an accurate picture of your tax situation. Federal returns can now be amended by electronically filing them, but only as far back as 2019 (the first year this option was available).
The IRS advises that you file an amended return with a claim for refund within three years of the day you filed your original return, or within two years of the day you paid outstanding tax, whichever is later. If you file a return before the due date (regardless of extensions), the IRS treats it as though you filed it on the due date. Withholding is deemed to be tax paid on the due date.
If you experienced changes related to any of the items above that have occurred since tax reform went into effect, you should file amended returns as soon as possible to correct any errors or oversights.
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