Looking Ahead….What You Need to Know About Your 2020 Taxes

As we enter the final month of the third quarter of 2020 and as everyone continues to deal with the Corona virus COVID-19 pandemic, it’s not too early to look ahead to the 2020 tax year filing season. In so doing, the small business owner has to consider the impact of existing and recently passed legislation on how they will file their taxes in 2021.

In addition to several changes brought on by the corona virus other legislative changes for tax year 2020 were set to happen anyway. These include the new standard deduction amounts, the 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.

Stimulus Payments

The $1,200 stimulus payment for a single person or the $2,400 for couples, officially known as a “Recovery Rebate,” is an advance refundable tax credit on your 2020 taxes. This means that no matter how much taxes you owe or don’t owe for that matter in 2020, you’ll get to keep all the money with no taxes due on it.

It is worth noting that 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.

Since the stimulus payment was based on your adjusted gross income (AGI) for 2018 or 2019, but technically applies to your 2020 AGI, there may be some discrepancy and confusion, but not need to worry as the news here is good:

• If your AGI for 2018 or 2019 (whichever one the IRS bases your stimulus payment on), is lower than your AGI for 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.

Tax Deductions

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. Note: Donations to donor advised funds and supporting organizations do not qualify.

Tax Credits

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.

Tax 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 $311,025 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.

Retirement Plans

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 his or her spouse was covered by a retirement plan at work, the deduction may be reduced or phased out. If neither the taxpayer nor his or her 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 $203,000.⁷

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 $10,000.⁷

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 $3,000.⁷

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.

User | 4/09/2020