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How to Amend Form 1040 and Submit Form 1040-X

To fix errors on form 1040, filers need to submit a separate Form
1040-X. Here, tax guru, Julian Block offers guidance on how to submit
1040-X, how the IRS might respond, and other considerations, such as
filing a state’s version of the 1040-X and what forms are right for
freelance workers.

Just joining us? Go to part one for the basics of Form 1040-X, Amended
U.S. Individual Income Tax Return, formerly Form 1040X, and the
guidance I would offer to a self-employed filer who needs advice on
how to submit 1040-X. Subsequent columns will alert her and other
filers to more aspects of 1040-X.

IRS responses to 1040-Xs. The news will either be good, meaning the
filer is entitled to a refund (it doesn’t count as reportable income),
plus interest (it counts), or bad, meaning she owes more in
nondeductible taxes, interest, and penalties. Let’s consider some
common scenarios.

First, let’s say the filer took the no-questions-asked standard
deduction amounts (Line 12a on 1040 for 2021) that are authorized for
nonitemizers and are adjusted annually to reflect intervening
inflation. She later discovered that it would’ve been more
advantageous to use Schedule A and itemize for outlays like medical
expenses (Lines 1-4), interest payments on her home mortgage (Line 8),
state and local income, and property taxes (Line 8) and donations
(Line 10).

Second, let’s say she operates her business as a sole proprietorship;
she submitted Schedules C (Profit or Loss From Business) and SE
(Social Security taxes for self-employed individuals). What she failed
to include on Schedule C were write-offs for outlays like purchases of
furniture and equipment or expenses incurred to attend work
conferences or other meetings.

Her 1040-X paperwork begins with filling out Schedule A and correcting
of Schedule C. Is her paperwork completed when she revises Schedule C
to claim more write-offs and decreases the amount shown for net
profit? Absolutely not.

To avoid overpaying her self-employment tax, she also needs to redo
Schedule SE. A reduced net profit on Schedule C doesn’t just reduce
the amount of her business income subject to income taxes. It also
reduces the amount of Schedule SE income subject to self-employment
taxes.

Many freelancers lose more to self-employment taxes than to income
taxes; I’d be remiss in my responsibilities if I were to fail to set
up another scenario, one that underscores why the filer might want to
meet with an accountant on whether to submit a refund claim.

While the IRS acknowledges that the filer is entitled to those
overlooked deductions for furniture and conferences, a diligent
reviewer has the option to expand the review of Schedule C and
disallow a lot of other write-offs. Should that happen, I would tell
her to forget about receiving a refund. What she’ll receive is an IRS
bill for additional taxes, plus non-deductible interest charges and
penalties.

State tax returns. Changes to her 1040 might also mean she must amend
her New York return. If so, she needs to file New York’s version of
the 1040-X. Requirements for state refund claims go all over the
place; she should take a close look at her New York refund claim to
see if what she’s claiming on her 1040-X needs to be reflected there
as well.

As noted previously, she is subject to income taxes imposed by New
York State and City. Her state is one of those that routinely receive
results of IRS examinations, such as its scrutiny of her 1040-X.

Soon after the IRS bills, New York will bill her for additional taxes
(which could be deductible on her 1040 form and not deductible on her
state form). New York also will ding her for interest charges and
penalties (that are definitely nondeductible on both forms).

Something else that she and her accountant need to consider about her
payment of the New York taxes: Does she forfeit any deduction or does
she salvage something on her 1040 for the year that she pays New York?
Whereas using the standard deduction means no deduction at all for the
payment, itemizing on Schedule A might help.

What complicates things is the Tax Cuts and Jobs Act that was enacted
at the close of 2017. It caps Schedule A deductions for payments of
state and local income taxes and property taxes. For the years 2018
through 2025, the ceiling is $10,000 for married couples filing joint
returns and single persons, dropping to $5,000 for couples filing
separate returns.

What’s next. More on other aspects of 1040-X in subsequent columns.

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