RECAP OF 2020 TAX CHANGES
There has been numerous tax changes for the 2020 tax year.
Recovery Rebate Credit
If you did not receive the first or second round stimulus payments and are eligible to receive a stimulus payment, you can claim the Recovery Rebate Credit in your 2020 tax filing. This would result in a $1,800 credit (first and second round payments) to you if filing single and have an Adjusted Gross Income (AGI) of $75,000 or less. If filing with dependents, that would be a $500 additional credit for each dependent under 17 years old and $2,400 credit for Married Filing Jointly.
Under the American Rescue Plan which was enacted in March 2021, a $1400 stimulus payment has been provided to tax payers. These payments are currently been sent out.
The American Rescue Plan also allows the first $10,200 of unemployment benefits to be exempt from federal taxes in 2020. The IRS will be issue refunds for those who filed early in the tax season prior to the implementation of this act and are eligible for this exemption, no need to file amended returns for this change.
The CARES Act allows COVID related withdrawals (up $100,000) from qualified retirement plans without incurring the 10% penalty. If you withdrew funds from a retirement plan in 2020 and it is COVID related, you are eligible to elect to have the total amount distributed over three tax years with the option to repay/replace the funds within 3 years without penalty if under 591/2yrs.
Required Minimum Distribution (RMD)
If you are 70½ to 72 you are required to take RMDs, however, under the CARES Act RMDs are not required in 2020 and there is no penalty applied.
The 2020 contribution limit for traditional IRAs and Roth IRAs is $6,000, and if you have contributions in excess of this amount, you have until May17th to withdraw the excess amount without incurring the 6%penalty on excess contributions. Similarly with 401K, the limit is $19,500 per tax payer for 2020 any excess can be withdrawn before the tax deadline.
If you are covered by a retirement plan at work, you will be eligible for a IRA contribution deduction. Married filing jointly filers with AGI of $104,000 or less, and single filers with AGI $65,000 or less receive a full deduction up to the amount of your contribution limit.
Other deductions and credits
Unreimbursed Medical Expenses
Taxpayers can deduct qualified unreimbursed medical expenses that are more than 7.5% of their 2020 adjusted gross income.
For the first time in 2020, taxpayers are allowed to deduct up $300 in charitable contributions while claiming the standard deduction. The standard deduction has increased to $12,400 for single and $24,800 for married filing jointly.
Deductions for home owners
If you own a home you can generally deduct, mortgage interest, real estate taxes, mortgage insurance premium paid for your primary residence. The mortgage insurance premium deduction was expect to be removed, however, it has been extended through 2021.
Energy related tax credits
Tax credits for residential energy efficiency is available for homeowners to claim the Residential Renewable Energy Tax Credit, on the total cost of solar, fuel cell, small wind, and geothermal energy equipment through 2022.
30%: In the case of property placed in service after December 31, 2016, and before January 1, 2020.
26%: In the case of property placed in service after December 31, 2019, and before January 1, 2023.
22%: In the case of property placed in service after December 31, 2022, and before January 1, 2024.
Self-Employment Tax deferral
As part of the relief provided under the CARES Act, for the 2020 tax year, Self-employed individuals can defer a portion of self-employment taxes until December 31, 2021. The Self-Employment tax rate is 15.3% (12.4% for social security and 2.9% for Medicare).
Additionally, if you are expected to owe $1,000 or more in federal taxes at the end of the year, it is recommend to make quarterly estimated tax payments which are due on April 15th, June 15th, September 15th and January 15th in-order to avoid penalties. If your state require income tax payments, it is recommend to also make quarterly estimated tax payments to offset your tax liability.
You are considered self-employed for tax purposes if you have a trade or business as a sole proprietor or independent contractor, so anyone who receives a 1099-NEC would file as self-employed and report income and expenses on Form Schedule C of your tax filing.
You’ve haven’t filed your 2020 return, well it is not too late, if you are due a refund, you can still file your return even after the May 17th deadline. So why not just file today?
If you own a business and need the K-1 to include in your personal return, it is also not too late to complete your business Form 1120-S for S Corporations or Form 1065 for Partnerships. Contact us today to complete your personal and business tax filing.