In my previous blog post, we discussed a combination of the nearly 30 million 2020 tax returns requiring manual processing, the backlog of unprocessed 2019 paper tax returns, congressional mandates to issue economic impact payments (EIPs) and provide other relief to taxpayers during the pandemic, IRS limited resources, and technology issues that have contributed to more and longer refund delays. Combine those circumstances with the extreme difficulty in speaking with a live customer service representative — employees have answered only about two percent of the roughly 75 million taxpayer calls to the IRS’s 1040 telephone line during the filing season as of April 17 — and the result is a very challenging filing season for taxpayers still waiting for refunds.

The passage of the American Rescue Plan Act (ARPA), signed into law on March 11, 2021, was a bit of good news for taxpayers as it impacts the taxability of unemployment compensation and excess Advance Premium Tax Credit (APTC) repayments. However, the legislation was enacted in the midst of the filing season, and while the law was beneficial to taxpayers, it did create administrative challenges for the IRS to implement and may result in some taxpayers receiving these tax benefits later.

First Legislative Change: Partial Exclusion of Unemployment Compensation Benefits from Income

Congress created a partial exclusion to the taxation of unemployment benefits providing that the first $10,200 of these benefits received in 2020 are exempt from taxation ($20,400 for married couples filing joint returns) if your modified adjusted gross income (AGI) is less than $150,000. Clearly this is a welcome change for millions of taxpayers who otherwise would have had a larger tax bill generated by their increased unemployment benefits provided over the last year to deal with the effects of the pandemic.

The IRS and tax preparation software companies moved swiftly to update their forms, instructions, and guidance for unemployment compensation recipients for returns not yet filed. Because these updates were done quickly, those taxpayers who had not yet filed do not need to do anything other than follow the instructions or prompts if filing electronically.

However, by the time this legislation was signed into law, nearly half of all tax year 2020 individual income tax returns had been filed with the IRS. Fortunately, the IRS was able to reprogram its systems to automatically reduce a taxpayer’s income up to $10,200 for each taxpayer who received unemployment compensation and included it in income ($20,400 for married couples filing joint returns), and announced on March 31 it will automatically recompute any deficiencies or refunds for these taxpayers. The IRS anticipates it will make those computations after the close of the 2020 filing season on the extended filing date of May 17, 2021, and it expects payments will be issued beginning in late May and will continue through the summer.

This is beneficial for taxpayers who already filed and computed their taxes based on the full amount of unemployment compensation. Taxpayers will not have the burden of filing an amended return and the IRS will not have to process millions of amended returns before issuing refunds. Once the IRS reduces the unemployment compensation, any resulting overpayment of tax will be refunded or applied to other outstanding taxes owed. Additionally, the IRS will automatically adjust certain credits already claimed on the return that increase as a result of the change in some taxpayer’s income, such as the Earned Income Tax Credit (EITC) where the taxpayer has claimed a qualifying child. Also, the IRS just published guidance that it will calculate and allow the amount of the EITC available to workers with no qualifying children, even where the taxpayer did not claim this credit on the original return. This recently published guidance states, “When the application of the unemployment income exclusion results in the taxpayer qualifying for the self-EIC, the credit will be calculated and included in the corrective adjustment. Taxpayers will not be required to file an amended return to receive self-EIC.” We anticipate the IRS will publish this in the Internal Revenue Manual (IRM) shortly (IRM 25.23.4.20.5, Recovery Rebate Credit (RRC) – Adjustments). Thus, when adjusting taxpayer’s returns to reflect the unemployment benefit exclusion, the IRS will also increase credits already claimed on the returns, when appropriate, and will claim the childless worker EITC where appropriate, even if the taxpayer did not claim it on his or her return. These credit adjustments will eliminate the need for millions of taxpayers to file amended returns.

One caveat: The IRS is not calculating all other federal credits or deductions not claimed on the original tax return for taxpayers with qualifying children who might now be eligible for that credit. These taxpayers will need to file amended returns if they did not originally claim the EITC with qualifying children or other federal credits but now are eligible because the exclusion reduced their adjusted gross income (AGI).

For the taxpayers to whom this applies, I recommend determining whether the reduction of AGI may provide eligibility for any credit not claimed on the original return, and file an amended return, if appropriate. For those taxpayers where it is advantageous to file an amended return, it is important to note that the IRS is experiencing delays in processing returns in certain circumstances and unfortunately, during this filing season, amended returns will not be processed quickly.

Second Legislative Change: Excess Advance Premium Tax Credit (APTC) Repayment

Under certain circumstances, taxpayers with a qualified health plan purchased through a health insurance marketplace may receive an advance payment of the premium tax credit (PTC), to reduce the cost of their monthly premiums. At the end of the year, the taxpayer must reconcile the advance premium tax credit (APTC) to ensure that the amount received in advance equals the PTC to which the taxpayer is entitled. For example, the amount of the credit could change at the end of the year based on a fluctuation of the taxpayer’s AGI that was not included as part of the household income amount reported to the marketplace. If the APTC received is greater than the PTC claimed on the tax return, the excess APTC increases the taxpayer’s tax liability for that tax year. Conversely, a net PTC is when the amount of the taxpayer’s PTC is more than the APTC paid. Both of these adjustments are reconciled on Form 8962, Premium Tax Credit.

In the ARPA, Congress suspended the requirement that taxpayers increase their tax liability by all or a portion of their excess APTC for tax year (TY) 2020. The IRS announced (IR-2021-84, April 9, 2021) that taxpayers with excess APTC for 2020 do not need to file Form 8962 with their return, or repay this excess amount on their 2020 Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, Schedule 2, Line 2, when they file.

Those taxpayers who filed their returns prior to the passage of the ARPA and included the excess APTC in their 2020 tax liability do not need to file amended returns. The IRS will reduce the taxpayers’ excess APTC amount to zero, thereby adjusting their liability, and automatically reimburse those taxpayers who have already repaid any excess APTC amount.

The IRS sent letters to taxpayers who filed returns before the passage of the ARPA if their returns claimed PTC but did not include a Form 8962. The letters instructed recipient taxpayers to submit Form 8962 to process their return. However, taxpayers who received excess APTC can now disregard this letter, because the IRS will process their returns without Form 8962. There is no need to contact the IRS.  

Note:  Those taxpayers who are claiming a net PTC will still need to file a Form 8962.

Remember, this change only applies to tax year 2020. Taxpayers who received the benefit of APTC prior to 2020 still need to file Form 8962 for the pre-2020 year to reconcile APTC and PTC, even if the taxpayer does not otherwise have a filing requirement for that year. As discussed in a prior blog post, delays in processing returns led to challenges in obtaining the APTC for several taxpayers.

Conclusion and Recommendations

The IRS’s ability to turn on a dime once the ARPA was enacted, to revise its forms and instructions, and to develop processes that make automatic adjustments without requiring taxpayers to file amended returns, is a testament to IRS leadership and its employees. After notification of these adjustments, taxpayers should review to ensure they reflect the reality of their tax situation and should immediately contact the IRS if they disagree.

Also, given these last-minute tax changes, it is critical those taxpayers who have not yet filed – particularly low-income, the elderly, and taxpayers with disabilities – have easy access to filing services such as Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) throughout the filing season, including throughout the postponed filing date of May 17, 2021. TAS has recommended in the past that VITA and TCE increase the number of sites that remain open beyond the filing season, to October 15. To ensure these filing services continue to be available and are enhanced in future filing seasons, it is essential that the volunteer programs receive adequate funding, and that volunteers continue to step forward. VITA and TCE volunteers are unsung heroes to so many taxpayers in need and are vital to tax administration. As National Volunteer Week comes to a close, I want to take a moment to recognize and thank them for all they do year after year for America’s taxpayers.

Additional Resources about the APTC

See: Fact Sheet 2021-08, More details about changes for taxpayers who received advanced payments of the 2020 Premium Tax Credit.