Here’s a quick summary of the tax code updates that may affect your 2020 federal tax return.
New for 2020
Those who did not receive the full Economic Impact Payments may be able to claim the Recovery Rebate Credit. You will need IRS Notice 1444: Your Economic Impact Payment, to calculate any Recovery Rebate Credit you may be eligible for on your 2020 federal income tax return. This notice should have come in the mail shortly after you received the payments.
Taxpayers may be able to claim the Recovery Rebate Credit if they met the eligibility criteria in 2020 and did not receive an Economic Impact Payment in 2020, or their payment was less than it should have been. This could be the case if your 2018/2019 income was too high for the full payment but your 2020 income is under the phaseout thresholds, or you have a new dependent in 2020.
Delayed Refunds Expected
Although the IRS issues most refunds in less than 21 days, they caution taxpayers not to rely on receiving a 2020 federal tax refund by a certain date, especially if you choose not to e-file. Staffing shortages caused by COVID-19 and the additional workload from issuing stimulus checks are slowing down some return processing at the IRS. By law, refunds that include the Earned Income Tax Credit or Additional Child Tax Credit cannot be issued before mid-February, and the soonest those refunds will be available is the first week of March.
Changes to Retirement Savings Rules
Under certain circumstances, the CARES Act waives the 10% Early Withdrawal Penalty on total withdrawals of up to $100,000 from IRAs and Defined Contribution Plans (such as 401(k)s) made between January 1 and December 31, 2020 by a person or family who were infected by the coronavirus or economically harmed by it. The rules are complex and we will discuss them with you during your appointment.
The CARES Act also waived the Required Minimum Distributions from IRAs and 401(k) plans for 2020. This includes distributions that would have been required by April 1, 2020 due to the account owner’s having turned age 70 ½ in 2019.
New Charitable Contribution Deduction
The new deduction created by the CARES Act allows for a deduction for charitable contributions of up to $300 for those who do not itemize deductions on Schedule A. The $300 is per return for taxpayers filing single and married filing jointly and capped at $150 each for married filing separately.
(Charitable deductions must be supported by documentation for every $1.00 you claim. For donations over $250.00, documentation must be obtained from the charity. The IRS has been auditing Non-Cash Contributions. We will only include non-cash contributions on your tax return if a worksheet is prepared. A worksheet is attached here.)
Identity Protection Pin
The IRS is expanding their Identity Protection PIN program, formerly limited to confirmed victims of identity theft. Beginning in 2021, any taxpayer who can verify their identity may choose to opt in. We encourage you to take this extra step to secure your SSN against fraudulent federal returns. New IP PINs are generated every year once you have opted in. This year they are expected to be sent out mid-January. You will need this PIN for your 2020 return and any prior year returns you file in 2021.
Educator Expense Deduction Change
Eligible educators are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses paid by them. It will now include personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19. This applies retroactively to March 12, 2020.
Temporary Special Rules for Health and Dependent Care Flexible Spending Accounts
A cafeteria plan may permit the carryover of unused amounts remaining in a health FSA as of the end of a plan year to pay or reimburse a participant for medical care expenses incurred during the following plan year, subject to the carryover limit (currently $550). The new Act expands the carryover period for 2020 and 2021. The provision also allows employers to extend the grace period for plan years ending in 2020 and 2021 to 12 months after the end of such plan year for unused benefits and contributions to health flexible spending and depend care flexible spending accounts.
In addition, an employer may allow an employee who ceases to participate in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which the employee’s participation ceased, including any extended grace period. The Act also provides a special carry forward rule for dependent care flexible spending accounts where the dependent aged out during the pandemic. Consult your plan administrator about any changes they have adopted.
Student Loan Payments by Employers
The CARES Act allows employers to pay down up to $5,250 on an employee’s college loans in 2020 without increasing the employee’s federal taxable income. In December, the Consolidated Appropriations Act extended the benefit through 2025. The $5,250 cap applies to both the student loan payment benefit and other education assistance such as tuition, books, or fees.
Paycheck Protection Program
Paycheck Protection Program loans can be used to pay qualifying expenses, which have been expanded to include expenses such as covered property damage, supplier costs, or worker protection expenditures in addition to employee wages or operating expenses like rent and utilities. When used for qualifying expenses, PPP loans are forgivable. The bill provides a simplified forgiveness application process for loans up to $50,000. The December bill clarified that businesses can deduct expenses paid with forgiven PPP loans. This clarification applies to old and new loans. If you received a PPP loan that was not forgiven, please call our office to discuss.
Deduction for Pass-Through Income
The income cap for the qualified business income deduction for self-employed people and owners of LLCs, S corporation and other pass-through entities was increased for 2020. Limitations on the deduction begin at $163,000 for single filers and $326,600 for joint filers.
Annual Inflation Updates
The Single and Married Filing Separately standard deduction is $12,400 for 2020. Head of Household is $18,650, and Married Filing Joint is $24,800.
Standard Mileage Rate
The standard mileage rate for the cost of operating your car for business is 57.5 cents a mile. Please note that in addition to mileage you are also allowed to deduct tolls, parking, property taxes and interest. The standard mileage rate allowed for the use of your car for medical purposes is 17 cents a mile and the standard mileage rate for the use of your car for volunteer services for a charity is 14 cents a mile for the entirety of 2020. (You can keep track of your mileage by using an App on your smart phone called Mile IQ. If you are self-employed and drive for business purposes, you need to keep track of time, place, and purpose for all your mileage driven. We suggest you take a picture of your odometer on January 1st and December 31st, and save receipts that document your mileage, such as oil change receipts.)
IRA and Retirement Account Contributions
The annual contribution limit for both Roth and Traditional IRAs increases to $6,000 for 2020 with an additional $1,000 additional if age 50 or older. Contributions to 401(k) and similar retirement plans are $19,500 for 2020 with a catch-up amount of $6,500 if age 50 or older. Self-Employment Pension Plan (SEP) maximum contributions increase to $57,000 for 2020.
Health Savings Account (HSA) Contributions
The maximum HSA contribution increased to $3,550 for single coverage and $7,100 for family coverage in 2020, with an additional $1,000 allowed if age 55 or older. Please note that you have until April 15, 2021 to contribute to your HSA for a 2020 deduction.
Other Items of Note
New Form 1099
To reduce confusion around filing deadlines, Form 1099-MISC has been redesigned and the new Form 1099-NEC Nonemployee Compensation was created. All nonemployee compensation income reporting, formerly reported in Box 7 of Form 1099-MISC, has moved to the new 2020 Form 1099-NEC. This includes payments made in the course of a trade or business to people providing services, such as payments to independent contractors. All other Form 1099-MISC income types, such as rent, prizes, or royalties, will continue to be reported on Form 1099-MISC.
Expired Deductions and Credits Extended
The December bill passed by Congress included numerous tax extenders. The 7.5% of AGI threshold for itemized medical expenses was made permanent. The exclusion from gross income of forgiven mortgage debt on a principal residence was extended through 2025 but lowers the maximum amount of tax-free forgiven debt to $750,000. The mortgage insurance premium deduction was extended through 2021.
Need a Copy of Your Previous Return?
You can obtain a record of your past tax returns and other tax documents. IRS transcripts are often used to validate income and tax filing status for mortgage applications, student and small business loan applications, and during tax preparation. You can obtain them directly from the IRS using their Get Transcript online service.
The IRS will begin accepting returns around January 25, 2021. Schedule early. Our calendar fills up fast as people begin to receive their W-2s. Take the stress out of filing by calling us as soon as you have your documents together. Leave yourself time before the April 15th deadline to catch and sort out any issues that arise. By filing earlier, you get your refund faster or have more time to pay what you owe and help protect any refund from identity thieves.