I know what you’re thinking: Hasn’t 2020 been bad enough without the government piling on some new tax laws we have to worry about?
I totally agree with you there! While it’s true that tax law changes don’t typically benefit taxpayers, because of recent congressional acts, there have been some changes that may actually help you this time around. Today I’m sharing the top 10 tax law changes you need to know in 2020.
1. Charitable Cash Donations
This one requires action right now because if you want to take advantage of this tax law change, you need to do it before December 31, 2020. A provision passed as part of the 2020 CARES Act allows a deduction for cash donations of up to $300 when you file your 2020 taxes. You do not have to itemize your personal deductions in order to receive this benefit. Just make sure your donations are going to a 501(c)3 organization.
2. Economic Impact Payments
I’m sure you haven’t forgotten that through the CARES Act, most taxpayers received what we typically refer to as “stimulus checks.” The good news is that these payments are not included in your gross income. Having received this money also does not reduce your refund amount, nor does it increase the amount you owe in taxes.
And, here’s where you’ll want to pay attention: If you didn’t get some or all of what the government was offering you for an economic impact payment in 2020, you can still claim that amount as a “Recovery Rebate Credit” when filing your 2020 taxes. Not sure if you got it all? Well, if you received $1,200 ($2,400 if married filing jointly in 2020) plus $500 for each qualifying child you had in 2020, then you received it all. If not, make sure you get your credit when filing your taxes.
Additionally, in case you’re wondering, there is no law that requires taxpayers to pay back any or all of the economic impact payments they’ve already received if they now make more money than they did in previous years (since previous income is what was used to determine the check amount).
3. Retirement Accounts
There have been several tax law changes in regards to retirement plans that could help you out this year.
Changes Affecting Everyone:
- Maximum contributions for 401(k)s, 403(b)s, 457 plans, and SIMPLE IRAs have all increased by $500.
- Income ceilings on Roth IRA contributions have increased and are based upon your adjusted gross income (AGI).
Changes Affecting Seniors:
- A big change in tax law has to do with required minimum distributions (RMDs), which is when seniors are required to take a certain amount of money out of their retirement accounts each year. The SECURE Act raised the minimum age of RMDs from 70½ to 72 for anyone who turns 70½ after 2019. Additionally, the CARES Act is allowing seniors to completely avoid RMDs in 2020 without penalty.
- Another change for seniors is that those with traditional IRAs can now make contributions past the age of 70½ beginning in 2020.
Changes Affecting New Parents:
- If you are having a baby or adopting, you can now take IRA and 401(k) payouts of up to $5,000 per spouse without paying the typical 10% fine.
Changes Affecting Payouts and Loans:
- Taxpayers younger than 59½ can take payouts from their IRAs and 401(k)s for COVID expenses without paying the 10% early withdrawal penalty as long as the payouts are under $100,000. This distribution can be included in income equally over a three-year period. Additionally, taxpayers can repay these loans within three years in order to treat the transaction as a direct rollover.
- Payments for retirement plan loans that were due to be paid back in 2020 are given a one-year extension.
4. Standard Deductions
As you likely remember, the tax law changes that went into effect a couple of years ago increased the standard deduction you receive on your taxes by almost double. The standard deduction amount has increased again for your 2020 taxes, but only slightly this time. Here are the new amounts:
- $12,400 for taxpayers who are single or married filing separately and under the age of 65.
- $14,050 for taxpayers who are single or married filing separately and over the age of 65.
- $24,800 for taxpayers who are married filing jointly and under the age of 65.
- $24,800 for taxpayers aged 65 or older who are married filing jointly, plus an additional $1,300 for each spouse over the age of 65.
- $18,650 for heads of household under the age of 65.
- $20,300 for heads of household over the age of 65.
5. Tax Brackets
The IRS has also slightly adjusted the tax brackets for 2020. They do this periodically to adjust for inflation, so most taxpayers will not be impacted by these changes. However, if you’re close to “leveling up,” you might want to check out these numbers:
- 37% for single taxpayers with incomes greater than $518,400 and $622,050 for married couples filing jointly.
- 35% for single taxpayers with incomes greater than $207,350 and $414,700 for married couples filing jointly.
- 32% for single taxpayers with incomes greater than $163,300 and $326,600 for married couples filing jointly.
- 24% for single taxpayers with incomes greater than $85,525 and $171,050 for married couples filing jointly.
- 22% for single taxpayers with incomes greater than $40,125 and $80,250 for married couples filing jointly.
- 12% for single taxpayers with incomes greater than $9,875 and $19,750 for married couples filing jointly.
6. Alternative Minimum Tax (AMT) Exemption
The Alternative Minimum Tax (AMT) was initially created for a very specific group of wealthy taxpayers who were using loopholes to avoid paying taxes. When it was created, it was not automatically updated for inflation, so each year, more upper middle-class taxpayers were getting hit with this tax. Recent changes in tax law have created automatic adjustments so this doesn’t happen. The new amounts for 2020 AMT exemptions are:
- $72,900 for single and head of household
- $113,400 for married couples filing jointly and qualifying widow(er)s
- $56,700 for married people filing separately
If you don’t understand AMT or are worried about incurring this tax, you should speak to a CPA about how to proceed.
7. New Form W-4
The IRS has changed the Form W-4 to make it simpler to fill out. However, you do not need to fill out a new one unless you were hired in 2020 or you want to adjust your income tax withholdings. The main difference between the old and new form is that you will no longer claim any withholding allowances on the form.
8. New Form 1099-MISC and Form 1099-NEC
Form 1099-MISC and Form 1099-NEC have also received updates. Basically, what you need to know here is that if you are a business owner, you will no longer report nonemployee compensation of $600 or more on Form 1099-MISC. Any payments to independent contractors, nonprofit organizations, or government agencies will now be reported on a Form 1099-NEC. Payments falling into this category include commission, prizes, awards, fees, or any other type of compensation. Just like before, Form 1099-MISC and now Form 1099-NEC should be given to the payee and filed with the IRS before January 31.
9. Long-Term Care Premium Payments Deduction
The IRS also raised the deduction allowed for taxpayers buying qualified long-term care insurance. The rate increases apply to taxpayers who itemize as well as self-employed taxpayers. The premium amounts can be included with Medicare premiums and are deductible if those total payments exceed 7.5% of the taxpayer’s adjusted gross income (AGI).
For 2020, the maximum amount of qualified long-term care premiums a taxpayer can include as medical expenses on Form 1040, Schedule A or in calculating the self-employed health insurance deduction are:
- $430 for age 40 and under
- $810 for age 41 to 50
- $1,630 for age 51 to 60
- $4,350 for age 61 to 70
- $5,430 for age 71 and over
10. Energy-efficiency Credit
This one is great news for you if you’ve had to replace systems in your home this year. In 2020, you can claim a credit worth 26% of expenses if you installed alternative energy equipment such as a solar water heater, solar electric equipment, a geothermal heat pump, or a wind turbine at your home. This credit is not refundable; however, any excess can be carried forward to future tax years.
As you can see, there’s really nothing too devastating on this list of tax law changes in 2020. And several of the items might actually help you out come tax time! Can you believe it? News from your CPA can be uplifting!
- Review all tax law changes for the year and speak to your CPA if you have any concerns or questions.
- After reviewing tax changes, decide if there are any that you should take advantage of before 2020 ends.
- If you want to capitalize on the charitable cash donation deduction, make your contribution to a qualifying organization now.
- Verify whether or not you have received all economic impact payments you are entitled to have.
- If you are a small business owner, review our Ultimate Guide to Tax Deductions.