Article Highlights

Slow Refunds 
COVID-19 
Economic Impact Payments 
Recovery Rebates 
Unemployment Debacle 
Using 2019 Income to Compute 2020 EITC and Additional Child Tax Credit 
Other Issues 
Where’s My Refund Tool 
IRS May Pay Interest on Late Refunds 

You are not alone. We have been hearing from clients who are still waiting on refunds from returns filed early in the year. In normal times, unless there is an error, the IRS will issue most refunds in less than 21 calendar days. However, 2021 is far from being a normal year for a number of reasons.
COVID-19 – Unlike most other employers that had to deal with the COVID-19 outbreak, IRS employees could not work from home because the computer system can only be accessed from IRS facilities. Thus, during 2020 and 2021 many IRS employees were furloughed. And the IRS got significantly behind in processing returns, especially paper-filed returns that must be input manually. As a result, the IRS was still processing 2019 returns at the beginning of the 2020 return filing season. Economic Impact Payments – Congress ordered the IRS to handle the task of issuing three economic impact payments, two in 2020 and one in 2021, tapping IRS resources. Recovery Rebates – To make matters worse, those first two economic impact payments had to be reconciled on the 2020 tax return, and if a taxpayer didn’t receive the amount they were entitled to, they were allowed an equivalent recovery rebate credit on their tax return. If there is a discrepancy between the amount of the payments reported on the tax return and what the IRS has on file for the economic impact payment amounts, the IRS is manually verifying the tax return for credit eligibility, which is delaying refunds. Unemployment Debacle – In March 2021, Congress, after the 2020 tax filing season had gotten underway and millions of taxpayers had already filed their returns, decided to make a portion of the unemployment compensation taxpayers received in 2020 tax-free. The IRS, in order to avoid millions of amended returns from being filed, has undertaken the task of automatically adjusting those returns and issuing refunds. Using 2019 Income to Compute 2020 EITC and Additional Child Tax Credit – The EITC and the additional child tax credit are based on a taxpayer’s earned income (income from working). However, because a preponderance of those who normally benefited from EITC and the additional child tax credit were unemployed during 2020, Congress allowed the 2019 earned income to be used in computing those credits for 2020, which also is causing processing delays. Other Issues – Other issues that cause delays in disbursing refunds include returns that are filed with missing information, those affected by identity theft and fraud, those filed with an injured spouse allocation on IRS Form 8379 (which can take a minimum of 14 weeks to process) and returns that warrant further review for other reasons.
You can use the IRS’s online tool “Where’s My Refund” to determine the status of your refund. To use that tool, you will need:

Social security number or ITIN 
Your filing status 
Your exact refund amount 

Generally, the IRS will pay interest on the refund due you starting from the later of the date: 

The return was filed. 
The return is received by IRS if it was filed after the due date. 
The IRS received the return in a format they can process. The IRS stops paying interest on overpayments on the date they issue the refund or it is used to offset an outstanding liability. 

Currently, the interest rate the IRS pays individuals on overpayments is 3%; the rate is adjusted quarterly but has been at 3% since July 1, 2020. Exception: No overpayment interest is paid if the IRS issues the refund within 45 days of the return due date, or the actual filing date if later. As you can see, refunds are not being issued as quickly as they were in years prior to COVID and there is not anything a tax preparer or taxpayer can do about the IRS not paying out refunds once a return is electronically filed and accepted by the IRS.

The complexity of life, coupled with the new tax laws surrounding the pandemic, can lead to changes in your tax situation after you have filed a tax return. This video will help you understand when you need to file an amended return to get the most benefits and avoid penalties.
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Article Highlights:

If You Don’t Rent Your Property 
If You Rent Your Property 
Rented Fewer Than 15 Days 
Personal Use Is Less Than the Greater of 15 Days or 10% of the Rental Days 
Personal Use Exceeds the Greater of 14 Days or 10% of the Rental Days 
If You Sell Your Vacation Home 
If You Sell Your Home 

Do you own a second home at the beach, in the mountains, or some other getaway location, or are you thinking about buying one? If so, then you may have thought about the possibility of renting it out. Though many people would never consider inviting renters into their vacation home, preferring to keep it for themselves and their family, doing so can offset some of the expenses related to the property, and you may even reap a tax benefit at the same time. Whichever route you choose to go, knowing all of the applicable tax rules regarding designated second homes helps you get the maximum financial benefit out of your asset and keeps you from making tax filing errors. If You Don’t Rent Your Property – Depending upon your individual tax situation, a designated second home’s acquisition mortgage interest may be able to be included as an itemized deduction. However, there is a limit on the amount of acquisition debt for a taxpayer’s main residence and one additional home for which the interest is deductible. For a primary residence and second home acquired before December 16, 2017, that limit is $1,000,000 ($500,000 if filing married separate). After December 15, 2017, the limit is reduced to $750,000 (except that debt incurred before December 16, 2017 still falls under the $1,000,000 limit). Real property taxes on your main and any number of additional homes are also deductible if you itemize deductions when figuring your regular tax, but not for the alternative minimum tax (AMT). However, even though itemized taxes include property tax, state income tax, and certain other taxes, the total amount allowed per year is limited to $10,000 ($5,000 if you are married and file a separate return from your spouse), so the deduction for some of your taxes may be limited. If You Rent Your Property – The tax ramifications of renting out your designated second home are largely dependent upon the amount of time that it is rented out during the year: (1) fewer than 15 days, (2) 15 days or more and your personal use is 10% or less and (3) 15 days or more and your personal use is more than 10%.

Rented Fewer Than 15 Days – When you rent out a dwelling unit that you use as a residence-whether it’s your main home or a second home-for a period that is fewer than 15 days during the year, you do not report the income and cannot deduct any rental-related expenses. However, you are still able to continue writing off eligible mortgage interest and real property taxes as itemized deductions. Used Personally But for Less Than the Greater of 15 Days or 10% of the Rental Days – In this scenario, the home’s use would be allocated into two separate activities: a rental home and a second home. Let’s say that the home is used 5% for personal use; then 5% of the interest and taxes would be treated as home interest and taxes that can be deducted as an itemized deduction. The other 95% of the interest and taxes would be rental expenses, combined with 95% of the insurance, utilities, allowable depreciation and 100% of the direct rental expenses. The result can be a deductible tax loss, which would be combined with all other rental activities and limited to a $25,000 loss per year for taxpayers with adjusted gross incomes (AGI) of $100,000 or less. This loss allowance is ratably phased out when AGI is between $100,000 and $150,000. Thus, if your income exceeds $150,000, the loss cannot be deducted; it is carried forward until the home is sold or there are gains from other passive activities that can be used to offset the loss.
Personal Use Exceeds the Greater of 14 Days or 10% of the Rental Days – For those whose personal use of the home is more than 10% of the amount of time that it is rented (or more than 14 days, whichever is greater), no rental tax loss is allowed. Let’s assume that the personal use of the home is 20%. As for the remaining 80%, it is used as a rental. The rental income is first reduced by 80% of the taxes and interest. If, after deducting the interest and taxes, there is still a profit, the direct rental expenses (such as the rental portion of the utilities, insurance and any other direct rental expenses) are deducted, but not more than will offset the remaining income. If there is still a profit, you can take a deduction for depreciation of the building, furnishings, etc., but it is again limited to the remaining profit. End result: No loss is allowed, but any remaining profit is taxable. The personal 20% of the interest and taxes is deducted as an itemized deduction, subject to the interest, taxes and AMT limitations discussed earlier. Take note that if the rental income becomes less than the business portion of the interest and taxes, the balance of the interest and taxes is still treated as home mortgage interest and taxes. 

If You Sell Your Vacation Home – Even if you use your vacation home to generate rental income, it is still considered to be a property for your personal use, and that means that once you sell it you are subject to taxation on any gains you realize. By contrast, if the sale results in a loss, you are not permitted to deduct any losses – at least not in the examples we’ve provided above. In some cases, a loss on a property can be broken down between the personal, nondeductible use and the business rental portion, which would be deductible. If You Sell Your Home – When you sell your primary home, you are able to take advantage of what is known as the home gain exclusion, but this is not true of designated second homes. The gain from the sale of a second home is taxable, but eligible for favorable capital gains tax rates in most cases. The only exception to this rule is when the taxpayer has occupied the second home as their primary residence for at least two of the five years immediately before the sale takes place. At no time during that two-year period can the home have been rented. When this is the case and the taxpayer hasn’t applied the home gain exclusion on the sale of another property in the previous two years, the taxpayer is able to take the exclusion. Doing so would allow married homeowners (where both qualify) to exclude from their income up to $500,000 of the home’s gain and single homeowners to exclude home sale gain of up to $250,000, except for depreciation of the home that has previously been deducted. Other Issues – There are certain situations involving designated second homes that are particularly complex, such as homes that are converted from an investment property to a primary residence, or when they were acquired by tax-deferred exchange. In these instances, it is essential that you consult with this office in order to ensure that all appropriate planning is done to provide you with the ability to gain the most benefit. If you rent out your property and provide additional services such as maid service, or rent it out for short-term stays, the IRS may view that activity as a business operation rather than a rental. When this is the case the tax ramifications are entirely different. Because of this and many other complicating factors and exceptions it would be appropriate to contact this office to review the tax impact of all of your real estate transactions.