The U.S. Treasury Department and IRS announced on Wednesday (March 17) that the federal income tax filing due date for individuals for the 2020 tax year will be automatically changed from April 15, 2021, to May 17, 2021.
The move is in part due to provisions of the American Rescue Plan Act that affect the taxes individuals will owe. Because the legislation only became law on March 11, 2021, but affects 2020 income, tax preparation software that rolled out months ago must be updated to reflect the changes.
Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Taxpayers, including those who are self-employed, should pay their federal income tax due by May 17, 2021, to avoid interest and penalties.
What has changed
The most significant changes in the law relate to the way unemployment benefits are taxed and the expanded child tax credit, according to Alyssa A. DiRusso, a professor at Samford University’s Cumberland School of Law who specializes in financial law, including wills, trusts, estates, taxation of nonprofit organizations and federal income tax law.
“There are many provisions in the American Rescue Plan Act (ARPA) that affect the taxes individuals will owe,” DiRusso said. “What changes are most important depend on your personal situation, like whether you’ve received unemployment in 2020 and whether you have children.”
Until the ARPA, unemployment benefits were taxable income to displaced workers, DiRusso said. “ARPA makes the first $10,200 of benefits tax-free for those with incomes under $150,000.
“Although most of the changes in ARPA are for 2021, this one is for 2020. This has caused a wrinkle for users of tax preparation software, whose developers couldn’t have foreseen this rule before rolling out the software several months ago.”
Child tax credit
A big-ticket tax perk for many families is the expanded child tax credit. For 2020, the child tax credit was $2,000 per child, up to age 17. Under the 2021 expansion, it’s $3,000 for ages 6 to 17 and $3,600 for under age 6.
“The expanded child tax credit is also now a fully refundable credit, which means you can get cash back from the IRS rather than just using it toward taxes you owe,” DiRusso said.
Another major change is that taxpayers who qualify for this credit “should be able to receive half of the credit as a periodic ‘allowance’ in the second half of 2021, rather than waiting to file their 2021 tax returns in early 2022. That’s when they’ll get the balance of the credit,” DiRusso said, noting that the benefit of the credit is phased out for those with higher incomes.
File now or wait?
DiRusso said that since the filing deadline for taxes has been pushed out until May 17, people who received unemployment benefits in 2020 may want to wait a little longer to file their taxes in order to give software developers time to update their systems. (Consult your personal tax adviser or the website of your tax preparation software for guidance on your specific situation.)
For those who have already filed, the IRS is expected to provide guidance soon on what steps to take. DiRusso said it’s possible the IRS may be able to rebate overpayments without taxpayers filing an updated return. In the IRS statement, IRS Commissioner Chuck Rettig recommended taxpayers consider filing “as soon as possible, especially those who are owed refunds.” Most tax refunds associated with e-filed returns are issued within 21 days, according to the IRS.
“Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to,” Rettig said.
The stimulus payments have gotten a lot of attention, DiRusso said. Many people have already received their share of the third round of payments, which put $1,400 per person, including each filer and dependent, into the pockets of taxpayers.
“People should be aware that the stimulus payment is technically a tax credit, which is good because it means it’s not income, so you don’t have to pay taxes on it,” DiRusso said.
And DiRusso pointed to one additional change in the law that is good news for churches, ministries and other nonprofit organizations — an enhanced benefit for charitable giving.
“For people who don’t itemize, they can deduct $300 in charitable gifts for 2020, and the ARPA increases this to $600 for 2021,” DiRusso said.
Charitable givers who itemize have no limit on the amount of money they can give to public charities in 2021, she added.
What doesn’t change
The changes to tax law made by ARPA applies to individuals only and do not change when quarterly estimated tax payments are due, according to the IRS. Those quarterly estimated tax payments are still due on April 15.
Neither do the federal changes apply to state filing and payment deadlines, which are set by individual states. To see the latest guidance from each state, click here.
Winter storm victims
Earlier this year, following the disaster declarations issued by the Federal Emergency Management Agency (FEMA), the IRS announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. This extension to May 17 does not affect the June deadline.
For more information about this disaster relief, visit the disaster relief page on IRS.gov.