How to Amend Form 1040 and Submit Form 1040-X

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 the 1040 for 2021) that’s authorized for nonitemizers and is 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 expense (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 correction 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 nondeductible 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 her, 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.