Proposed Tax Changes for Tax Year 2020

The closest things to “magic words” when it comes to taxes are deductions and credits. Both help you keep more money in your pocket instead of Uncle Sam’s, but they do so in slightly different ways!

Tax deductions help lower how much of your income is subject to federal income taxes. Some deductions are only available if you choose to itemize your deductions, while others are still available even if you decide to take the standard deduction.

Meanwhile, tax credits lower your actual tax bill dollar for dollar, and there are two types of credits: refundable and nonrefundable. If a credit is greater than  the amount you owe and it’s a refundable credit, the difference is paid to you as a refund. Score! But if it’s a nonrefundable credit, your tax bill will be deduced to zero, but you won’t get a refund. That’s still great!  Here are some deductions and credits you might be able to claim on your 2020 tax return:

STANDARD DEDUCTION

The standard deduction for a married couple is $24,800, married filing separately is $12,400, head of household is $21,500 and single is $12,400. Additional dependents are $500. If you are over 65 you will receive an additional $1300 added to your deduction.

FILING STATUS:

There are five filing statuses:

*SINGLE

*MARRIED FILING JOINT (MFJ)

*MARRIED FILING SEPARATELY (MFS)

*HEAD OF HOUSEHOLD (HOH)

*QUALIFYING WIDOW(ER) (QW)

SINGLE:

A tax-payer is single if unmarried or separated from a spouse, either by divorce or a separate maintenance decree, on December 31. A widow(er) whose spouse died before 2020 is single unless he meets the test for qualifying widow(er).

MARRIED FILING JOINTLY:

Taxpayers may file jointly if on the last day of the year they are:

*Married and living together,

*Married and living apart, but not legally separated or divorced,

*Separated under an interlocutory (not final) divorce decree, or

*Living in a common-law marriage, if common-law marriage is recognized in the

state where they currently reside or in the state where the marriage began.

If one spouse died in 2020, the survivor can file jointly with the decedent if the couple met one of the above tests on the date of death and the survivor did not remarry in 2020.

*Same-sex marriages. For federal tax purposes, the term spouse includes an individual married to a person of the same sex if the couple is lawfully married under state (or foreign) law, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. However, individuals who have entered into a registered domestic partnership, civil union or other similar relationship that is not considered a marriage under state (or foreign) law are not considered married for federal tax purposes.

HEAD OF HOUSEHOLD:

To qualify as Head of Household the tax payer must meet all of these test:

*The taxpayer is not married at the end of the year ( exception: Married taxpayers can qualify as HOH but meeting the test for considered unmarried.

*The taxpayer paid more than half the costs of keeping up his home.

*The home was the principal residence for more than half the year for either of the following:

The taxpayer’s qualifying child

The taxpayer’s qualifying relative who is the taxpayer’s dependent

*The taxpayer is a U.S. Citizen or resident during the entire year.

STUDENT LOAN INTEREST DEDUCTION:

Taxpayers can deduct up to $2500 of interest paid on qualified education loans for college or vocational school expenses as an adjustment to income (above-the-line) (IRC 221).The deduction is available for interest on qualifying loans for the benefit of the taxpayer or the taxpayer’s spouse or dependent at the time that the debt was incurred.  Read more at the IRS.

EARNED INCOME TAX CREDIT

EITC is a refundable credit for low and moderate income workers. The amount depends on the amount of income and the number of children you have. If you qualify for the EITC make sure you don’t forget it. You may lose a significant amount of your refund.

For 2020 there are some special rules for calculating the EITC due to the Coronavirus. You may use either the 2019 or 2020 income to calculate your EITC.  You may use whichever number gets you the larger EITC. The Child Tax Credit is figured in the same manner. Be sure to ask your preparer about using both numbers in figuring your refund. You do not have to have a child in order to receive the EITC.

Once again, the IRS will be holding the Earned Income Credit Returns until mid-February before they are released.

UNEMPLOYMENT BENEFITS

Many Americans found themselves out of work (at least temporarily) after the pandemic shut down a large part of the economy and turned to unemployment insurance for help.  Those who received unemployment benefits will need to pay income taxes on that money.

RETIREMENT INCOME

The CARES Act also affects a few things related to retirement income. The new age for the required minimum distribution (RMD) has gone from 70 ‘A to 72. This affects anyone born after 2019. This allows seniors to skip the RMD in 2020 with no penalty. Also the age that you can contribute to a Traditional IRA has been raised from 70Y2. If you are having a baby or adopting a child you may take a distribution of up to $5000 without having to pay the 10% penalty. In 2020, in addition to the RMD changes mentioned above the CARES Act also says that if due to the Coronavirus you receive a retirement distribution then the 10% penalty will also be waived.

TAX BRACKETS

The tax brackets were raised significantly so that you will stay in a lower tax
bracket longer. Here is a breakdown:

2020 Marginal Income Tax Rates and Brackets

2021 Tax Brackets

TAX REFUNDS

If you were one of the thousands of taxpayers whose refund was held up due to the Coronavirus then you probably received interest on your refund amount. That amount is taxable interest and must be reported. The IRS will send you a 1099INT sometime in mid to late January to advise you of the amount you need to report.

HEALTH SAVINGS ACCOUNT

These accounts allow you to put away pretax or tax-deductible money and have it grow free of taxes. You can take a tax-free withdrawal to cover qualified health expenses. This year, you can save up to $3,550 if you’re an individual with self-only health coverage. That’s up from $3,500 in 2019. Account holders with family plans can save up to $7,100 in this account, up from $7,000 in 2019

CARES ACT

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, most Americans received a stimulus check in 2020 for $1200 ($2400 for a married couple) plus $500 for each child under 17.

Technically, your stimulus check was an advance payment of a special 2020 tax credit known as the Recovery Rebate Credit. When you file your 2020 return, you will have to reconcile the stimulus check that you received with the Recovery Rebate Credit that you are entitled to claim. For most people, the stimulus check will equal the tax credit that you are allowed. In that case your credit will be reduced to zero. However, if your stimulus check was less than your credit amount then the tax you owe will be reduced by that amount or it will be received as a refund on your return. If your stimulus check was more than your credit amount you will generally not have repay the difference to the IRS. The good news is the stimulus checks are not taxable!!

NEW CREDIT – QUALIFIED BUSINESS INCOME

There is a new credit called QBI (Qualified Business Income) for each trade, business or farm that is showing a profit from their business activity.  The credit is calculated by percentage of the amount of net income.  The credit is subject to phase-outs and limitations based on total income.

MOVING EXPENSE DEDUCTIONS:

Only military changing duty stations may deduct moving expenses.

ALIMONY DEDUCTION:

The deduction for alimony paid beginning after 2018 is no longer deductible to the payer or reportable by the recipient.  Before 2018 the law is the same, however the date of divorce must be included.

EDUCATION CREDITS:

The Education Credits , Lifetime and American Opportunity and Tuition & Fees Deduction are still in effect with certain phase out levels.

TAX DEADLINE

Tax Day is Thursday, April 15, 2021. You must file your 2020 tax returns by this date! Did you have a wild year in 2020? In that case, working with a tax pro is a
smart move.

HELPFUL HINTS

If you are having your return done professionally you will need to bring your prior year return, photo id and social security cards for everyone on the return.

CHECK YOUR TAX PREPARER’S QUALIFICATIONS:

All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. Paid preparers must sign return and include their PTIN as required by   law. The preparer must also give you a copy of the return.

IDENTITY PROTECTION:

If you want to make sure your identity is protected, you may apply for an Identity Protection Personal Identification Number that will be used to protect your return.

W-4 INFORMATION:

Each Employee needs to fill out a new W-4 with their employer for 2020.

Please note: This is only a short list of some of the new tax rules for 2020. Please spend time with your tax preparer and learn the rules at IRS.GOV so you and your advisor are knowledgeable about qualifying expenses, eligible purchases, contributions, gifts, etc., so you can reduce your tax burden.