Tax Changes You Should Know for 2020 Returns

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Tax Changes You Should Know for 2020 Returns

Every year, you have to file tax returns and every year there are changes to the tax code. Here are some key changes for 2020 to keep in mind when you prepare returns.

Tax Changes You Should Know for 2020 Returns

2020 was not a fairly quite year when it came to changes to the tax code. With all pandemic issues, most changes were in the form of major overhauls. This break seems to have given the IRS a change to clean up some of its procedures as it has started simplifying forms. Nonetheless, here are changes to keep in mind when preparing your tax returns.

Summary:

Every year, you have to file tax returns and every year there are changes to the tax code. Here are some key changes for 2020 to keep in mind when you prepare returns.

1. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-Related Tax Relief Act, most Americans received one or two stimulus checks in 2020. Technically, your stimulus checks were an advance payment of a special 2020 tax credit known as the recovery rebate credit. When you file your 2020 return, you’ll have to reconcile the stimulus checks you received with the recovery rebate credit you’re entitled to claim. 

2. The business mileage allowance is 57.5 cents for 2020. While it was 58 cents for 2019. IRS also already announced the rate for 2021. Apparently, for some reason, IRS is decreasing the rate to 56 cents per mile. 

3. In a positive development, the exemption amount on your tax returns has gone up. For each exemption, you can now deduct a hefty $4,300 per exemption. Keep in mind, however, that exemptions are graduated per your adjusted gross earnings. The more you make, the less of an exemption you can claim. The specific graduated percentages depend on your filing status, so you’ll have to take a look at the tax tables to ascertain the impact on your tax filings.

4. Under the SECURE Act, the beginning age for taking RMDs rises from 70½ to 72. (This change only applies to account owners who turn 70½ after 2019.) The CARES Act allows seniors to skip their RMDs in 2020 without penalty.

5. Tax rates on long-term capital gains and qualified dividends did not change for 2020, but the income thresholds to qualify for the various rates did go up. In 2020, the 0% rate applies for individual taxpayers with taxable income up to $40,000 on single returns ($39,375 for 2019), $53,600 for head-of-household filers ($52,750 for 2019) and $80,000 for joint returns ($78,750 for 2019).

The 20% rate for 2020 starts at $441,451 for singles ($434,550 for 2019), $469,051 for heads of household ($461,700 for 2019) and $496,601 for couples filing jointly ($488,850 for 2019).

The 15% rate is for filers with taxable incomes between the 0% and 20% breakpoints.

6. Standard deduction users can write off up to $300 of charitable cash contributions.

7. Tax credits against the self-employment tax are also allowed for self-employed people who can’t work for a reason that would entitle them to coronavirus-related sick or family leave if he or she were an employee. 

8. The CARES Act allows employers to pay down up to $5,250 in workers’ college loans in 2020. The payments are excluded from the workers’ wages for federal tax purposes. 

9. If you lost your job or had a change in income in 2020, there’s a new rule that can boost or allow you to qualify for the earned income tax credit (EITC). Under the rule, you can use your 2019 earned income to figure your 2020 EITC if your 2019 earned income is more than your 2020 earned income.

10. The standard deduction that can be claimed by those who do not itemize has gone up. Again, it depends on your filing status, so make sure you take a close look at the numbers on whatever version of form 1040 you are using this year. For example, as a single filer, you can deduct $12,400. If you are married and filing jointly your deduction can be $24,800.

11. The earned income tax credit assists low-income taxpayers by cutting the amount of taxes that have to be paid. To claim the tax credit, you have to be earning under a certain amount. This amount has increased for the 2020 tax year. You’ll have to look at your tax form to get the specific amount as it varies pursuant to your filing status and the number of children you are claiming.

12. If you lived in any area devastated by Hurricane Dorian, Michael, Florence, or you were victims of the California Wildfire, the IRS is giving out major concessions to help alleviate any tax problems. Go to the IRS website to learn more.

13. If you received unemployment benefits during 2020, the IRS announced that for single filers the first $10,200 and for married filing jointly the first $20,200 is not taxable. Whoever paid taxes, they will be refunded.

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