Important Tax Updates for Your Tax Return 2020

 

 

 

Here are some important things you need to know for the 2021 tax season:

  • Tax Day is Thursday, April 15, 2021. You must file your 2020 tax returns by this date!
  • The standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly.  
  • Income tax brackets increased in 2020 to account for inflation. 
  • Several changes to the SECURE Act make saving for retirement easier and more accessible.
  • The CARES Act, designed to stimulate the economy, has important provisions that impact individuals and small businesses.

 

Tax situations are like fingerprints.  No two are exactly the same.  As a tax professional, our primary goal is to understand and deliver a personalized service to save every cent you deserve.  Let us support you in planning, preparing and filing your taxes, and everything else involving the IRS.

 

 

Inflation-Adjusted Federal Income Tax Brackets

A quick reminder that Your tax rate (the percentages of your income that you pay in taxes) is based on what tax bracket (income range) you are in. For example, if you’re single and your income is $75,000, then you’re in the 22% tax bracket. But that doesn’t mean your tax rate is a flat 22%. Instead, part of your income is taxed at 10%, another part at 12%, and the last part at 22%.

 

For the 2020 tax year, the tax rates are the same—but there are some slight changes to the brackets. Basically, the brackets have been adjusted by a few hundred dollars from 2019 to account for inflation. (Source: Updated tax brackets from IRS)

 

Taxable Income Exceeding

Tax Rate

Medicare Surtax on

Single

Filing Jointly

Ordinary Income

Adj Net Capital Gain & Qualified Dividends (1)

Earned Income

Net Inv. Income

$0

$0

10%

0%

2.9%

0%

$9,950

$19,900

12%

$40,400

$80,800

15%

$40,525

$81,050

22%

$86,375

$172,750

24%

$164,925

$250,000

32%

$200,000

$329,850

 

3.8%

3.8%

$209, 425

$418,850

35%

$445,850

$501,600

20%

$523,600

$628,300

37%

(1) Other long-term capital gains could be taxed as high as 25% (building recapture) or 28% (collectibles and stock)

(2) Include employer contribution of 1.45%, the individual contribution of 1.45%, and an additional tax rate of 0.9% for AGI over $200K for an unmarried individual and $250K on a joint return

 

 The federal tax rate for Trusts and Estates

Taxable income exceeding

Tax Rate

Adj. Net Cap gain & Qualified dividends (1)

Medicare Surtax on Net inv income

$0

10%

0%

0%

$2,650

24%

$2,700

 

15%

$9,550

35%

$13,050

37%

$13,250

20%

3.8%
  • Other long-term capital gains could be taxed as high as 25% (building recapture) or 28% (collectibles and stock)

 

SECURE Act – Smarter way to retirement

The SECURE Act made several changes to make saving for retirement easier and more accessible.  Here are some of the notable ones.  For a deeper summary read this article.  

  • Allowing Individuals to use the funds in 529 plans to repay student loans.
  • Delayed start for Required Minimum Distribution (RMD).
  • Age-based limitation on Traditional IRS contributions is lifted.
  • The Big one: 10-Year payouts for most designated Beneficiaries.

 

CARES Act – Coronavirus and Taxes!

The CARES Act, designed to stimulate the economy, has important provisions that impact individuals and small businesses.

  • Economic Stimulus Rebates for individuals.
  • Special rules for “Coronavirus-related distributions” from IRAs and Defined contribution plans.
  • Suspension of RMD for 2020.
  • Above-the-line deduction of $300 for qualified charitable contributions.
  • Provisions regarding HSA accounts.
  • Provisions related to Student loans.
  • PPP loans and loan cancellations.
  • Changes to rules on Net operating Loss limits.
  • Eased limitations on the deduction for active business interest.
  • Retroactive treatment for qualified Improvement property.

Please note that HEALS Act expanded some of the CARES Act provisions.

 

 

Deductions and Credits

 

Charitable Deductions

The CARES Act allows you to deduct up to 100% of their adjusted gross income (AGI), which is your total income minus other deductions you have already taken, in qualified charitable donations if you plan to itemize their deductions. The CARES Act added a new “above-the-line” deduction that will help you write off up to $300 of charitable contributions you made in cash even if you aren’t itemizing deductions.

 

Business Deductions

With most of us working from home you may be tempted to claim the home office deduction, but it is reserved for self-employed individuals only.

 

Stimulus Checks

Your stimulus check will not count as taxable income. it’s treated as a refundable tax credit for 2020. In essence you got an advance on money you would have received anyway as part of your tax refund in 2021.

 

Paycheck Protection Program (PPP) Loans

The CARES Act also tried to help struggling small business owners stay afloat by offering them Paycheck Protection Program (PPP) loans. As long as these loans were used on certain business expenses—payroll, rent or interest on mortgage payments, and utilities, to name a few—these loans were designed to be “forgiven.”(Ref SBA) 

 

Educational Expenses: 529 Plans and ESAs 

Any money you take out of a 529 plan or Educational Savings Account (ESA) must be used for qualified educational expenses to be tax-free. There are also a couple of new ways you can use 529 plans in 2020 without having to pay any taxes such as the cost of certain apprenticeship programs and pay off up to $10,000 in student loan in total without having to pay any penalties or taxes(Ref. IRS).

 

Retirement Plans: 401(k)s, IRAs and More

There were a lot of changes to retirement plans in 2020—and some of those changes could impact your tax bill this year. 

  • The CARES Act allows folks under age 59 1/2 to take up to $100,000 out of their 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty.
  • If you own a traditional IRA, you have to take money out of your account once you reach a certain age. Those withdrawals are called required minimum distributions (RMDs). The good news is the SECURE Act pushed back the age for RMDs from traditional IRAs from 70 1/2 to 72 (if your 70th birthday was July 1, 2019 or later). On top of that, the CARES Act allows seniors to skip RMDs altogether in 2020 without penalty.
  • The SECURE Act also allows owners of traditional IRAs to keep putting money in their accounts past age 70 1/2 starting in 2020.
  • If you did take some money out of a 401(k) or traditional IRA and you’re facing a huge tax bill, don’t panic! You have three years to put those funds back and get a refund on any taxes you paid on that money.