As Congress Considers Tax Changes, Here’s How To Decide When To File

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Andrew Perri, President & Founder

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Pinnacle Wealth Management
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Tax legislation that could provide additional tax breaks to low-income families and small businesses is currently stalled in the Senate. The House passed its version of the Tax Relief for American Families and Workers Act of 2024 on Jan. 31, 2024—two days after the IRS began accepting e-filed individual returns for processing. The House version of the bill included changes to depreciation and research and development expenses that could affect many business returns both for separate entities (corporations, S-corporations and partnerships) and for businesses that file using a Schedule C attached to an individual Form 1040.

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With tax legislation pending in Congress (some of it retroactive) should taxpayers wait to file their tax returns?

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A slow start to the 2024 tax filing season could indicate that many taxpayers are waiting for Congress to act on this pending legislation before filing their tax returns. Just before filing season opened, IRS Commissioner Danny Werfel urged taxpayers not to wait on Congress but to file when they were ready .

Unfortunately, for many taxpayers, that is easier said than done—especially when there is the potential for retroactive tax law changes that could affect a return that was previously filed. So, should you wait to file your tax return? Depending on the piece of the legislation that matters to you, the answers to that question are no, yes, and it depends.

Waiting On The Child Tax Credit? Don’t Wait To File

If you are a taxpayer with children who qualify for the child tax credit and you’re waiting to file to see if the credit is increased, don’t wait. File and get your refund.

The current legislation increases the refundable portion from $1,600 to $1,800 per qualifying child for tax year 2023. The refundable portion of the credit is available only to filers who do not have any tax against which the non-refundable child tax credit would apply. The amount of that credit ($2000), is not changed by the bill.

Taxpayers who get the full non-refundable child tax credit as an offset of their 2023 federal taxes will not get any benefit from the new legislation and should not wait to file their returns. Neither should taxpayers whose income is in the phase-out range for the credit ($400,000 to $440,000 for joint filers and $200,000 to $240,000 for other filing statuses). Typically, those taxpayers are not eligible for the refundable portion of the credit, either.

Only the refundable portion of the credit is changed, and an increase in the refundable portion of the credit will not affect taxable income or tax owed. So, should Congress pass this legislation during or after the regular filing season ends, it would be fairly simple for the IRS to find returns that would qualify for the additional $200 in refundable credit and issue those refunds to taxpayers.

Again, file now and get your refund. If an additional amount becomes available, the IRS will issue you an additional refund.

Have An ERC Claim? Don’t Wait To File

The pending legislation would end the Employee Retention Credit program on Jan. 31, 2024 instead of April 15, 2024. Many small businesses with legitimate ERC claims were told by their tax professionals that they still had time to file their claims. And, although the IRS issued a moratorium on processing new ERC claims in late 2023, the agency still planned on accepting claims through April 15.

The law hasn’t passed yet. And whether the retroactive change to the ERC filing deadline will remain in the final version is anyone’s guess. The worst-case scenario is the IRS tells you no. If you have a legitimate ERC claim, file it and wait for the IRS to process it or to tell you that you missed the deadline because it was changed by Congress retroactively.

Expecting A Form K-1? Wait To File

The pending legislation includes several changes that are favorable to businesses who claim depreciation and/or have research and development expenses. Many tax professionals who prepare business returns for businesses that issue Form K-1 are advising those businesses to request filing extension to see if those favorable changes will reduce their tax.

If the business return is on extension, that means individuals who receive Form K-1 will require an extension, too. Taxpayers who normally receive K-1s from S-corporations, partnerships, or trusts with business interests should plan on requesting an extension and waiting to file their Forms 1040 until they receive their K-1s.

Taxpayers should not file, or ask their tax professional to file, a 1040 without the K-1. Taxpayers can make inquiries of the firm preparing the business return (or the partner or shareholder responsible for overseeing return preparation) about expected income and whether or not the K-1 will be late so that they can prepare accurate requests for extension for individual returns and calculate any necessary extension payments. Calculating an extension payment is an important part of the extension request. Scenarios called “zero extensions,” where no is tax calculated and/or paid, could be considered invalid by the IRS.

Own A Business? It Depends

Partners and shareholders in partnerships and S-corporations, respectively, may not have a choice but to wait to file if they are using a tax professional. Many tax professionals, rather than filing (and charging for) amended business entity returns, are simply insisting that those business returns (Form 1065 for partnerships and Form 1120-S for S-corporations) be put on extension to see if Congress decides to act.

Business owners who have incurred research and development expenses or who could benefit from the depreciation changes in the bill may also want to file an extension and wait to see what Congress does, even if they file the tax returns for their business.

Waiting to file is almost always better than filing and amending. Filing now is rolling the dice and betting that Congress won’t act. While that often seems like a safe bet, that is definitely going to depend on your risk tolerance as a taxpayer and, if you file your own taxes, your threshold for administrative pain. Filing amended returns is even less enjoyable than filing original returns.

Of course, waiting to file business entity returns means that any individual returns requiring a K-1 from that entity will also have to be extended, as discussed above.

Married And SALT Capped? It Depends

The cap on the itemized deduction for state and local taxes (or SALT) took effect with the Tax Cuts and Jobs Act in 2017. It included a significant marriage penalty. The deduction was capped at $10,000 per return. Typically, joint filers receive a limit that is twice as high as for single filers for deductions (for example, the standard deduction) and credits. Earlier this year the House blocked a retroactive bill that would have removed this marriage penalty for one year.

Fixing the SALT cap by either removing it entirely, increasing the limit, and/or removing the marriage penalty is popular with taxpayers and with some members of Congress. And while the bill to remove the SALT cap that was blocked by the House was a piece of legislation separate from the other pending retroactive legislation, there is nothing to say that a SALT fix couldn’t be added to the Senate version of the pending legislation. Indeed, something similar happened with a bill excluding unemployment income from adjusted gross income during the Covid-19 pandemic. It was a separate bill that ended up being included in a larger piece of tax legislation that included other retroactive changes.

The IRS automatically adjusted the AGI and the tax for those affected by the retroactive exclusion of unemployment income. Nevertheless, because AGI affects the thresholds for various other tax benefits, many tax professionals felt compelled to review previously filed and IRS-adjusted returns for their clients to ensure all associated tax benefits (sometimes including state benefits) were realized. Should Congress decide to address the SALT cap either on its own or as part of the larger piece of pending legislation, associated changes to taxpayer AGI could affect tax return results beyond what the IRS is capable of adjusting. As with the changes affecting business owners discussed above, waiting to file is a gamble. And only you can decide if you want to take that bet.

By Amber Gray-Fenner, Contributor

© 2024 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.

Andrew Perri profile photo

Andrew Perri, President & Founder

aperri@pinnaclewealthonline.com
Pinnacle Wealth Management
Andrew : 810-220-6322