As Americans deal with the COVID-19 pandemic, it's not too early to look ahead to the 2020 tax year filing season including the impact of existing and recent legislation on how you will file in 2021.
In addition to several changes brought on by coronavirus-related legislation, other changes for the 2020 tax year were set to happen anyway. These include new standard deduction amounts, income thresholds for tax brackets, certain tax credits, and an increase in retirement savings limits. Others, including deductions for medical and dental expenses, and state and local sales taxes have remained the same.
Tax year 2020 quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can be delayed until July 15 without penalty.
Your $1,200 ($2,400 for couples) stimulus payment, officially known as a "Recovery Rebate," is an advance refundable tax credit on 2020 taxes. This means no matter how much you owe (or don't owe) in taxes for the 2020 tax year, you get to keep all the money with no taxes due on it.
Since the stimulus payment will either be based on your adjusted gross income (AGI) for 2018 or 2019, but technically applies to your 2020 AGI, there may be some discrepancy. Don't worry. The news there is good as well.
- If it turns out your AGI for 2018 or 2019 (whichever one the IRS bases your stimulus payment on), is lower than 2020, resulting in a higher payment, you can keep the overage.
- If your AGI for 2018/19 is higher than your AGI in 2020, you can claim the additional amount owed when you file your 2020 taxes in 2021.
- This applies to dependents under 17 as well. If someone else claims a child now, based on 2018/19 returns, but you legitimately claim that child on your 2020 return, you will get a $500 tax credit when you file in 2021 and the person who got it based on 2018/19 returns will not have to pay it back.
- If you have a child in 2020 you can claim the child when you file in 2021 and receive the $500 credit then.
Finally, your recovery rebate is not taxable. It will not add to your taxable income in 2020 (or any other year). All of this is based on the fact that the CARES Act contains no "claw back" mechanism by which the government can reclaim funds that were legitimately extended.
- Recently passed coronavirus legislation has added to tax law changes already set to take place for the 2020 tax year.
- Although stimulus payments are related to your income in 2020, built-in safeguards minimize the impact on your taxes.
- The standard deduction for those married filing jointly rose to $24,800 for tax year 2020, up $400 from 2019.
- Income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have all increased for 2020.
- An important change lets you deduct $300 in charitable contributions "above-the-line."
- Changes relaxing retirement account withdrawals and RMDs are designed to help.
- Estates of decedents who die during 2020 have a basic exclusion amount of $11.58 million, up from $11.4 million from the year prior.
Brackets and Rates
For tax year 2020, the top tax rate remains 37% for individual taxpayers filing as single and with income greater than $518,400, which is a modest bump up from $510,300 for 2019. The income threshold for this rate will be $622,050 for married couples filing jointly (MFJ) and $311,0215 for married individuals filing separately (MFS).
Income ranges of other rates up to the next-highest threshold are as follows:
- 35% for single and MFS income exceeding $207,350 ($414,700 for MFJ)
- 32% for single and MFS income exceeding $163,300 ($326,600 for MFJ)
- 24% for single and MFS income exceeding $85,525 ($171,050 for MFJ)
- 22% for single and MFS income exceeding $40,125 ($80,250 for MFJ)
- 12% for single and MFS income exceeding $9,875 ($19,750 for MFJ)
The lowest rate is 10% for single individuals and married couples filing separately, whose income is $9,875 or less. For married individuals filing jointly, the combined income may not exceed $19,750.
For those filing as head of household (HOH), the income thresholds are the same as rates for singles in the 37%, 35%, and 32% brackets.
In other HOH brackets, the income thresholds are now $85,501 to $163,300 in the 24% bracket; $53,701 to $85,500 in the 22% bracket; $14,101 to $53,700 in the 12% bracket; and up to $14,100 in the 10% bracket.
Income thresholds for long-term capital gains rates also increased to the following levels:
- 0% for single and MFS income up to $40,000, up to $80,000 for MFJ, and up to $53,600 for HOH
- 15% for single income $40,001 to $441,450, $80,001 to $496,600 for MFJ, $40,001 to $248,300 for MFS, and $53,601 to $469,050 for HOH
- 20% for single income exceeding $441,450, exceeding $496,600 for MFJ, exceeding $248,300 for MFS, and exceeding $469,050 for HOH
The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from 2019. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 for 2020, up $200 from 2019. For heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.
The alternative minimum tax (AMT) exemption amount for single filers for tax year 2020 is $72,900, up $1,200 from 2019, and begins phasing out at $518,400. For married couples filing jointly, the AMT exemption amount is $113,400, which begins phasing out at $1,036,800.
The CARES Act allows a $300 "above-the-line" deduction for cash contributions to charity if you take the standard deduction when you file in 2021. For those who itemize, the law lifts the 60% of adjusted gross income (AGI) limitation, on cash contributions. Individuals can elect to deduct donations up to 100% of their 2020 AGI Note: Donations to donor-advised funds and supporting organizations do not qualify.
The contribution limit for employees who participate in employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan (TSP) has been increased to $19,500, up from $19,000 in 2019. The catch-up contribution limit for employees age 50 and older increased to $6,500, up from $6,000 in 2019. The contribution limit for SIMPLE retirement accounts for 2020 has been raised to $13,500, up from $13,000 for 2019.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. During the year, if either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out. If neither the taxpayer nor their spouse is covered by an employer-sponsored retirement plan, the phase-outs of the deduction do not apply. Phase-out ranges for 2020 are as follows:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
- For MFJ, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
- For an IRA contributor who is not covered by a workplace retirement plan, but who is married to someone who is covered, the deduction is phased out if the couple's income is between $196,000 and $206,000, up from $193,000 and $203,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up $2,000 from 2019. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up $3,000.
The income limit for the saver’s credit (also referred to as the retirement savings contributions credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000 in 2019; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.
Retirement Fund Withdrawals and Loans
If you qualify for a coronavirus-related distribution (CRD) from your qualified retirement fund in 2020, it will not be subject to a 10% early-withdrawal penalty. The distribution will be taxable, but taxes can be spread over three years instead of being due the year of the withdrawal. If you pay the funds back to the plan within three years, it will be considered a rollover and non-taxable.
New rules also allow you to take out a loan of up to $100,000 or the amount in your employer-sponsored retirement plan (whichever is smaller) anytime between March 27, 2020, and September 22, 2020, and delay payments on the loan for up to one year. (Interest will accrue.) If you already have an outstanding loan those payments can also be deferred for one year.
Required Minimum Distributions (RMDs)
Required minimum distributions (RMDs) for IRAs and defined contribution plans, such as profit sharing and 401(k) plans, are waived for 2020. This includes your first RMD if you reached age 70½ during 2019. You do not have to qualify for a CRD in order to get this exception. If you have already received an RMD in 2020, you can roll it back into the plan within 60 days and defer paying taxes on the amount.
The tax year 2020 maximum earned income credit (EIC) is $6,660 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,557 for 2019.
For tax year 2020, the modified adjusted gross income (MAGI) amount used by married joint filers to determine the reduction in the lifetime learning credit is $118,000 and phases out at $138,000, up from $116,000–$136,000 for tax year 2019. For single filers and heads of households, the MAGI range is $59,000–$69,000 for 2020, up from $58,000–$68,000 in 2019. You can't claim the credit if you are a married individual filing separately.
For the taxable years beginning in 2020, the dollar limit for employee salary reductions for contributions to a health flexible spending account (FSA) is $2,750, up $50 from the limit for 2019.
For tax year 2020, participants who have self-only coverage in a medical savings account (MSA), the plan must have an annual deductible that is not less than $2,350 (the same as for tax year 2019) but not more than $3,550, an increase of $50 from 2019. For self-only coverage, the maximum out-of-pocket expense amount is $4,750, up $100 from 2019. For participants with family coverage, the floor for the annual deductible is $4,750, up from $4,650 in 2019. The deductible cannot exceed $7,100, up $100 from the limit for tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020, an increase of $100 from 2019.
Estates and Gifts
Estates of decedents who die during 2020 have a basic exclusion amount of $11.58 million, up from $11.4 million for estates of decedents who died in 2019. The annual exclusion for gifts is $15,000 for calendar 2020, the same as it was for calendar 2019.
The Bottom Line
The inflation adjustments of the IRS are meant to ease federal taxes for taxpayers, so it pays to know the latest figures, which you can use to thoughtfully plan for the 2020 tax year.