The 2020 tax season is going to sneak up on us, especially now that the 2019 season just ended last week. Several of the coronavirus relief laws that were passed on a federal level, including the CARES Act, created new tax credits and other changes for the upcoming tax season. The late 2019 SECURE Act, passed before we knew about the current crisis, will also begin to show its impact on 2020 tax returns.
Here are seven of the 2020 tax changes we believe will apply to a wide variety of taxpayers.
1. Recovery Rebates
Did your family receive a stimulus check after the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed? These economic recovery rebates are an advance payment of a special 2020 tax credit. For most people, the rebate will equal the tax credit allowed. If the payment you received is more than your credit, it’s unclear (but unlikely) whether you’ll have to repay the treasury. If you didn’t receive a payment and believe you’re eligible, you’ll have the opportunity to claim the credit on your 2020 tax return.
2. Retirement Plans
Most of the tax law changes impacting retirement plans are included in the SECURE Act, which was passed in December 2019, but the CARES Act brought about a few changes as well.
One of the most significant changes has to do with required minimum distributions (RMDs). Under the SECURE Act, the beginning age for taking RMDs was raised from 70½ to 72 years old. The CARES Act allows seniors to skip RMDs in 2020 without penalty.
Seniors who are owners of traditional IRAs are now permitted to make contributions beyond the age of 70½. In addition, parents who gave birth to or adopted a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay a penalty for early withdrawals. Also, beginning in 2020, fellowships, stipends, or similar payments to graduate or post-doctoral students will be considered compensation, allowing qualified students to begin making IRA contributions sooner.
The SECURE Act also made changes to the rules for withdrawing money from inherited IRAs and workplace retirement accounts. In many cases, the money needs to be withdrawn from the account within 10 years of the IRA owner or 401(k) participant’s death. There are some exceptions to that rule, which allow payouts over the beneficiary’s life expectancy if they fall into one of these categories: a surviving spouse, a disabled or chronically ill relative, a minor child until they reach 18, and anyone who is not more than 10 years younger than the account owner.
Within the CARES Act, the penalty typically associated with early withdrawals from retirement accounts has been waived for up to $100,000 of coronavirus-related payouts. A coronavirus-related payout can also be distributed in equal installments over a 3-year period. You can avoid tax consequences if you return the distribution amount to your retirement account within 3 years. The CARES Act also allows eligible individuals to borrow up to $100,000 from workplace plans, until September 23, 2020.
The maximum contribution allowed for retirement plans and IRAs in 2020 grew by $500. Deduction phaseouts for traditional IRAs also start at higher levels in 2020, from AGIs of $104,000 to $124,000 for couples and $65,000 to $75,000 for single filers—a $1,000 increase from last year.
3. Deadlines and Penalties
Although the deadline for filing your 2019 tax return was extended to July 15th, the fine for filing a late return has increased. The minimum penalty for returns filed 60 or more days late is now $435 (for tax returns required to be filed in 2020) or 100% of your unpaid tax, whichever is less. If you did not file a tax return or extension for 2019, you should do so immediately.
4. 2020 Tax Bracket Changes
The income tax brackets for 2020 are wider than 2019’s; tax rates did not change.
5. Standard Deduction Increase
Married couples now have a standard deduction of $24,800 ($24,400 for 2019), plus an additional $1,300 for each spouse who is 65 and older. Single filers can claim $12,400 ($12,200 for 2019) or $14,050 if they’re at least 65. Head-of-household filers receive $18,650 for their standard deduction ($18,350 for 2019), plus an additional $1,650 once they reach 65.
6. Capital Gain Rates
While tax rates did not change, the income thresholds to qualify for the rates on long-term capital gains and qualified dividends went up for 2020.
7. Charitable Gift Deductions
Now is the time to give a large charitable donation, if you have the means to do so. Under the CARES Act, the 60%-of-AGI limit on deductions for cash donations by people who itemize was suspended, allowing for more charitable donations to be deducted.
Those who don’t itemize can write off up to $300 of charitable cash contributions. Join our Facebook Live event with Rethreaded at 12 pm EST on July 31 to hear Joel Chamberlain explain this new deduction introduced in response to the pandemic. To join the event, simply visit Rethreaded’s Facebook page at noon on July 31.
These are some of the tax law changes taking effect this year. A professional tax preparer can help you to understand your eligibility for deductions and credits, and also to make a plan that accounts for these changes. Looking for a trusted strategic financial advisor? Contact us to schedule a free consultation.