We can all say we are glad 2020 is in the books; however, there is still one thing to see about (if you haven’t already) and that’s taxes. There are a number of fiscal year 2020 tax changes to know about, so that you don’t pay more to Uncle Sam that you need to.
This article is a rundown of changes (and a few things that stayed the same) from last year. It’s important to stay up-to-date on these 2020 tax changes whether you are preparing your own taxes or hiring someone to prepare them for you. Understanding tax law can help you make better financial decisions throughout the year.
When is Tax Day 2021?
Tax Day is April 15, 2021, so you must file your taxes electronically or have them postmarked by this date. As of now, it is prudent to take steps to have your taxes prepared and filed by the April 15th date.
Do know, though, that on February 18, the House Ways and Means Committee sent a letter to the IRS requesting that this April 15th date be pushed back to allow individuals more time to have their taxes prepared due to the on-going pandemic. Follow us on Social Media (Facebook or Instagram) to stay up to date if the Tax Day 2021 is pushed back. A reminder that there is no guarantee that Tax Day will in fact be pushed back.
One of the 2020 Tax Changes is Higher Standard Deductions
The IRS adjusted standard deductions for tax year 2020 in order to account for inflation. The following table shows you how the standard deductions changed.
|Married Filing Jointly||$24,400||$24,800|
|Married Filing Separately||$12,200||$12,400|
|Head of Household||$18,350||$18,650|
It’s important to know the standard deduction amounts, because every filing has the option to be filed using the standard deduction or an itemized deduction. You can subtract one or the other from your taxable income. This ensures that all individuals have some income that is not subject to federal income tax.
Taking the standard deduction is the easiest way to calculate tax; however, it can cost you. It is important to review your expenses and determine which deduction (standard or itemized) is best for you. If you made significant charitable contributions, had large amounts of out-of-pocket medical expenses, or paid a significant amount in mortgage expenses, or a combination of these items (and others), either use your tax software or consult a tax professional to determine if itemizing is your best option.
The CARES Act Did Affect Charitable Contribution Deductions
In years past once you choose the standard deduction or itemized deduction route, you’ve determined which deduction is right for you. However, the CARES Act created one of the 2020 tax changes that makes one possible addition to the standard deduction that is important to note.
In 2020, if you made a cash donation to a charitable organization (503-c), you are eligible to add up to $300 in deductions on top of your standard deduction. So, if you have a receipt for a cash contribution to a charitable organization, know that you can add up to $300 to your deduction. So, make sure to provide the receipt to your tax professional or ensure that you put the contribution amount into your tax software.
Changes to Tax Credits
Once you have made deductions to your income, you now have your adjusted-gross income and your tax liability is calculated. Tax forms then allow you to apply tax credits, to lower your tax bill dollar for dollar. So, the more credits you can apply, the lower tax you pay. Here are a few things to know about 2020 tax changes specific to credits:
Earned Income Tax Credit
The Earned Income Tax Credit may be claimed by individuals or couples married filing separately who earned $50,954 or less and couples married filing jointly who earned $56,844 or less. These income levels were increased from last year, so that is why I included this tax credit to this 2020 tax changes article.
The amount of this credit varies based on the number of qualifying children (or dependents). Here is the table from the IRS on the total maximum credit a person can be eligible for.
|Number of Children||Tax Credit Amount|
|No qualifying children||$543|
|1 qualifying child||$3,618|
|2 qualifying children||$5,980|
|3 qualifying children or more||$6,728|
There are phase outs of this credit if you have interest or dividend income. Interestingly, about 20% of individuals who are eligible for this credit don’t claim it. So, be sure to review the tax guidance if you are preparing your own taxes or work with your tax professional to at least review if you qualify.
There are a number of additional tax credits; however tax credit amounts like for the child tax credit did not change (they are still $2,000 for couples filing jointly that earned less than $400,000 or $200,000 in earnings for all other tax filing statuses). If you aren’t sure about additional tax credits, I have linked the IRS’s website below.
Other Tax Topics Related to the Pandemic
Well, like I said at the beginning, the pandemic of 2020 is something we may want to forget. However, as we prepare our taxes, there are some related topics that you may have on your mind or perhaps you don’t because you’re not sure where to start. So, this section is all about things to be thinking about related to the pandemic and taxes, and is a reminder of why you follow MPower Co…. so we can help you stay on top of the financial things that are important!
You may be wondering if your stimulus checks are considered taxable income. They are not. In the words of the IRS, “No, the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 or 2021 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs.”
Many individuals needed to claim unemployment benefits during 2020. Unemployment benefits are taxable. So, like other income received in 2020, unemployment compensation is included.
Education Expenses (529 and Educational Savings Accounts)
Education was odd in 2020. Many schools were remote part of the year and some even closed. Taking money out of qualified education accounts (like 529 Plans and Educational Savings Accounts (ESAs) must be used on qualified education related expenses.
If you are in a situation where funds you used from 529 Plans or ESA Plans were returned to you from schools, if you did not put the funds back into the qualified education account, you may owe income tax and a withdrawal penalty.
Retirement Account Changes
The pandemic affected qualified retirement accounts in a number of ways that have resulted in fiscal year 2020 tax changes. Here are a few things to keep in mind during this tax season:
- The CARES Act did allow individuals to take up to $100,000 out of retirement accounts without having to pay an early withdrawal penalty. This does not mean, though, that these withdrawals are tax free. Tax on the earnings still applies. MPower Co wants to also point out that accessing money earmarked for retirement prior to retirement needs to always be a last resort whether there is a penalty or not.
- The CARES Act allowed individuals who were previously required to take distributions from Individual Retirement Accounts to leave the money in the accounts, which will affect their tax bills.
- The SECURE Act did two things. It increased the age of required minimum distributions to age 72 (if your 70th birthday was July 1, 2019, or later) and allows individuals to continue putting money into traditional individual retirement accounts past the age of 70 ½. Traditional IRA contributions are tax deductible, so this allows for an additional tax deduction.
Visit The IRS’ Website
This article lists the major 2020 tax changes and is not all-inclusive. There is likely additional information of value to you if you are preparing your taxes yourself. If you are working with a tax professional, you may have other questions that you want to verify. If you want to review how your specific tax situation may apply to you, visit the IRS website. The IRS has this interactive tax questions tool that is a great starting point for any questions you may face in the area of tax.
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