Choosing Between MFS w/ Invalid Roth IRA Contrb. and MFJ w/ UCE Ineligibility

[fiveohno]

Hi guys, I hope you can help me make sense of this and choose the best path to resolution!

In 2020 my wife and I filed separately, as it seemed to reduce the total tax burden. My wife had a tax bill (~$2.9k) and paid in full. I had a refund ($2.8k) and was paid. So we had both settled up for the year.

At the time I was unaware this invalidated my Roth IRA contribution for the year ($6k). I realized this mistake and filed an amended return to merge into a MFJ and solve the IRA issue. All our inputs stayed the same, and we were both on standard deductions. Turbo Tax said that we should receive an additional $754 refund. 

They took almost 10 months to process this and finally sent a letter saying that we owed an additional ~$2k + penalties. I went back and forth with them trying to understand the source of this bill. They claimed that we didn't file a form for the child tax credit, so that was removed (which was untrue). Then, they closed the case without looking into it further or giving a correct reason. 

I got referred to a taxpayer advocate, who sent a letter closing the case without ever speaking to me, claiming that the issue was that we didn't report my original refund amount and that is why we owed money.

My whole argument is that since we both individually settled our 2020 taxes, the only way that any money is owed in either direction is if our total tax liability changed by switching filing status. So, I poured over all the numbers and believe that I finally found the source of the change:

When covid hit in 2020, my employer was able to stay open, but my hours got cut back. Some of this reduction in work was covered by unemployment benefits. On my individual return (Sched 1, line 8), there is a UCE credit for $10,200, that is not found on the joint return. Looking into the eligibility requirements for that exclusion, our combined AGI crossed the $150k threshold, and made me ineligible.

So, unless I am missing another option, I either need to pay the back taxes and penalties on that $10,200, or amend the return back to MFS and deal with fixing the ineligible Roth contribution.

Any advice much appreciated!

[dmertz · Accepted solution]

Amending from joint to separate is not permitted after the due date of the tax return.

[Critter-3]

I got referred to a taxpayer advocate, who sent a letter closing the case without ever speaking to me, claiming that the issue was that we didn't report my original refund amount and that is why we owed money.  I think this is the most accurate reason ... amending to combine 2 separate returns is not easy and the program will not do it automatically.  You needed to use the downloaded program so you could make direct line entries on the 1040X (or complete it manually) so missing your original refund was most likely the error the IRS caught.

My whole argument is that since we both individually settled our 2020 taxes, the only way that any money is owed in either direction is if our total tax liability changed by switching filing status. So, I poured over all the numbers and believe that I finally found the source of the change:

When covid hit in 2020, my employer was able to stay open, but my hours got cut back. Some of this reduction in work was covered by unemployment benefits. On my individual return (Sched 1, line 8), there is a UCE credit for $10,200, that is not found on the joint return. Looking into the eligibility requirements for that exclusion, our combined AGI crossed the $150k threshold, and made me ineligible.  YEP ... that is another reason that filing jointly could hurt.  

So, unless I am missing another option, I either need to pay the back taxes and penalties on that $10,200, or amend the return back to MFS and deal with fixing the ineligible Roth contribution.  Sorry ... this is no longer an option once you amended to switch from MFS to MFJ after the due date of the original return.  I highly recommend you talk to a local tax pro if you cannot see what happened. 

[Opus 17]

I am slightly puzzled because, if you knew from the beginning that filing jointly had higher taxes, then you should have questioned the result when amending from separate to joint resulted in an additional refund.  You may not have correctly accounted for both spouses’ payments and refunds when trying to amend from MFS to joint.   

Your transcript from the IRS website may show the adjustments that the IRS made to your amended joint tax return. I haven’t tried to use the transcripts for this purpose, but it would be worth looking at.

https://www.irs.gov/individuals/get-transcript

It sounds like you actually owed additional taxes on the joint return but failed to account for the original refund, so it looked like you were due an additional refund instead of owing a payment.  The $2000 you owed represents a repayment of the $754 refund you shouldn’t have gotten plus $1300 in additional tax, possible from the loss of the UC exclusion.  

If you had asked back in 2020, there might’ve been a way to fix the Roth problem without needing to change to a joint return.  Unfortunately, it is now too late to amend a joint return back to separate.

[fiveohno]

@Critter-3 

I actually amended this using TTO, not manually.

It seems to me that for a guided process on amending a return that has already been filed, it should very specifically ask about any tax refunds received and tax bills paid, for both parties.

[fiveohno]

@Opus 17 

I was confused when we originally ran the numbers and came up with higher tax liability for MFJ. I generally thought this was incentivised, and couldn't understand why. 

When I ran the numbers a second time and saw a modest reduction in tax, I figured that I made some stupid mistake the first time, like double counting the child tax credit or something. 

Is there any way to cancel the amendment and revert to the original return?

[VolvoGirl]

Are you doing the Amended returns in the Desktop program now?  And you haven't actually filed the amended returns?

My Cancel Amend link doesn't work now.  I'll have to find if they posted a new one.  But for Desktop program you can  switch to Forms mode and delete the 1040X.  Then you have to take out the changes you made to put your return back to the way it was originally filed.

[Critter-3]

Ok ... once again the online program does not amend the return automatically or  correctly  when switching from MFS to MFJ ... you must make direct form entries in the FORMS mode when using the downloaded program. You must also review the return before filing so if you did not catch the error when you filed the return it seems that the IRS did find it and made the correction and sent the bill.   If you don't agree with their changes then you can respond to the notice as directed. 

[VolvoGirl]

Found the new link if anyone is interested.  How to cancel or undo an Amended return in the Desktop program
https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-return/cancel-undo-amended-return-tu...

[dmertz · Accepted solution]

IRS Pub 17 notes the following:  "Once you file a joint return, you can’t choose to file separate returns for that year after the due date of the return."  I don't see how filing Form 1040-X to change from filing separately to filing jointly can be considered to be anything other than filing a joint return, making it impermissible to now revert to filing separately.

[Opus 17]

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@fiveohno wrote:

Is there any way to cancel the amendment and revert to the original return?

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A joint return could be amended to a different joint return, if you can identify other errors.  However, the basis for the amended return would be the current return on file with the IRS after their adjustments, not the amended return you filed (which the IRS thinks was incorrect).

A joint return can never be amended back to separate returns after the original filing deadline (which I believe was July 15, 2021 for 2020 returns).