Please note: This article provides general background information only and is not intended to serve as tax advice or as a substitute for legal counsel. You should consult your tax advisor or attorney if you have a question requiring legal or tax advice.
Being aware of tax changes before filing taxes can save you a headache. And before you begin looking for specific changes, it’s important to understand the vocabulary of tax season.
The tax year refers to the just-completed calendar year. So the taxes you’re filing during the 2021 tax season are for the tax year 2020. The IRS has already introduced reforms that will apply for the tax year 2021.
There are often subtle changes to the tax code, and a few sweeping tax reforms that command headlines. In 2017, the Tax Cuts and Jobs Act made big changes like increasing the standard deduction and child tax credit and increasing the amount of inheritance that could be protected from taxes.
If you have questions about your specific tax situation, it’s best to talk to a tax professional.
Here are some of the IRS tax changes for the tax year 2020.
Related: IRA tax deduction rules
IRS Tax Changes for the 2020 Tax Year
Some changes in the tax code are relatively subtle and may not be applicable to your tax situation. For example, tax rates are the same for the 2020 tax year, but, as with other years, tax brackets shifted slightly to adjust for inflation.
There are also subtle shifts in the standard deduction: Married couples get $24,800 instead of $24,400 from 2019.
Subtle changes of several hundred dollars or one or two percentage points may seem like no big deal, but they can affect your overall tax bill, so it can be a good idea to make sure you’re following 2020 tax year rules, and double-check anything if you’re preparing your taxes yourself.
Be aware of the following pivots from the Tax Cuts and Jobs Act and COVID-specific carve-outs when filing for tax year 2020.
1. Charitable Cash Contribution Write-Offs
For many taxpayers, thanks to the TCJA, it made sense to take the standard deduction rather than itemize deductions. People who took the standard deduction did not have the opportunity to write off charitable contributions.
In tax year 2020, taxpayers who take the standard deduction can also write off $300 in charitable cash contributions. The $300 is per return, not per person, which means married taxpayers filing jointly can claim only $300.
A charitable cash contribution is exclusive of political donations, which cannot be deducted.
2. Extenders on Certain Tax Breaks
Congress has the power to pass “extenders” on certain tax breaks that are scheduled to sunset in a certain year. For 2020, the extenders include tuition and fee deductions for eligible educational institutions, the deductible eligibility of mortgage insurance premiums, and qualified energy-efficiency home improvements up to a $500 credit limit.
3. Tax Credits Related to the Coronavirus Paid Leave Law
The Coronavirus Paid Leave Law provides a dollar-for-dollar credit to small and midsize employers for the cost of providing coronavirus-related leave. Even self-employed workers can receive a credit on their taxes if they had to take sick leave or child care leave for COVID-19-related reasons.
4. Waived RMDs for 2020
As part of the CARES Act, required minimum distribution requirements were waived for the 2020 tax year. This applies to people who ordinarily are required to take RMDs, including those who have beneficiary accounts. Ordinarily, RMDs are treated as taxable income.
5. Changes to Beneficiary IRA Inheritance
In the past, people who inherited IRAs from non-spouses had the option to “stretch” their RMDs to accommodate their life expectancy. Under the SECURE Act, people who inherit IRAs from people who die on or after January 1, 2020, are required to empty the account within 10 years. The money taken out is treated as taxable income.
6. Ability to Continue to Contribute to IRA Accounts
In the past, taxpayers over the age of 70.5 were ineligible to make contributions to IRA accounts. But in 2020 and beyond, taxpayers of any age can make contributions to their IRA accounts.
Common COVID Relief Questions for the 2020 Tax Year
This is not a comprehensive list of IRS changes for the 2020 tax year. If you have questions about your specific situation, speak with your tax preparer.
As of now, what hasn’t changed is the due date to file and pay your 2020 tax return. Right now, the deadline set by the IRS is April 15, the same date that has been used in previous years. Pay attention to headlines and news from the IRS regarding deadlines in the coming months.
Nonetheless, here are some commonly asked questions about the 2020 tax year.
1. Are Stimulus Payments Taxable?
One common question is whether stimulus payments in 2020 or 2021 will count as part of a taxpayer’s adjusted gross income. The answer: Stimulus payments are not counted as income and are not taxable.
2. Is Unemployment Insurance Taxable?
If you received unemployment compensation at some point during the year, you may wonder how it will affect your year-end tax bill. Unemployment benefits, including the special unemployment compensation authorized under the CARES Act, are taxable.
People who received unemployment insurance should receive a Form 1099-G. This is the payment that will be reported to the IRS. Tax rates drop as income does, so you may be in a different tax bracket than you have been in the past.
3. Are Employer Contributions to Student Loan Debt Taxable?
As part of the CARES Act, employers were allowed to give up to $5,250 to their employees to pay down student loan debt. This money is not considered taxable income for 2020 by the IRS.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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