With the IRS accepting 2020 tax returns as of February 12, now is a good time to gather documents and prepare to file as soon as possible.
Below are useful insights gleaned from tax
publications including the 2020 Individual Investor’s Guide to Personal Tax Planning from the American Association of Individual
Investors (AAII):
¨ New
Line for Recovery Rebate Credit- Otherwise known as “stimulus” received via the
CARES Act, there is a new line on Form 1040 for this. If your 2020 taxable income
was less than either your 2018 or 2019 income (whichever tax year was used to
calculate your stimulus payout received during 2020), you may receive a larger
credit. If the reverse happened, you do not need to repay any of the “excess” amount
that you received.
¨ New
Line for Charitable Deductions- Also as a result of the CARES Act, the almost 90%
of taxpayers who do not itemize deductions because the standard deduction is
higher can deduct up to $300 for cash contributions to qualified charities. The
$300 limit applies to both singles and married couples filing jointly. Like the
Recovery Rebate Credit, there is a new line on Form 1040 for this deduction.
¨ Cryptocurrency
Question- The question “At any time during [tax year] did you receive, sell,
send, exchange or otherwise any financial interest in any virtual currency?” was
moved to the front page of Form 1040, just beneath a taxpayer’s name and
address, to make it harder to miss. The IRS is trying to capture income earned
from virtual currencies and make it more difficult for tax[payers to claim
ignorance about tax reporting rules.
¨ Floor
for Medical Expense Deductions- As a result of the SECURE Act, the floor for
calculating deductible unreimbursed (by insurance) medical expenses is 7.5% of
adjusted gross income (AGI) for 2020 tax returns. For the 2021 tax year, it
reverts back to 10% of AGI. Some state income tax systems have a lower AGI
limit so tally up your receipts and after-tax payroll deductions for health insurance
premiums to see if you qualify.
¨ New
State Income Taxes- Tax experts have warned that those who worked
remotely or decamped to another state other than their primary work or
residence state during the pandemic may owe taxes to that
second state. This includes people who relocated to a second home or to live with
relatives. The amount owed will depend on tax rules of the states in question
and whether there are any reciprocity agreements between them.
¨ Same
SALT Cap- Unlike many features of income tax law, there is no inflation indexing
for the $10,000 cap on state and local taxes (SALT). This cap began in 2018 and
is in effect through 2025 under the Tax Cuts and Jobs Act (TCJA). Also under
the TCJA, personal exemptions continue to be eliminated through 2025.
¨ Individual
Retirement Account (IRA) Contributions- Tax-deferred retirement savings contributions
for tax year 2020 into IRAs can be made until April 15, 2021. Ditto for
prior-year simplified employee pension (SEP) contributions for self-employed
individuals.
¨ Taxation
of Unemployment Benefits- Many more Americans received unemployment benefits
this year than previously due to pandemic-related job losses and furloughs.
This is a good reminder that the federal government taxes unemployment benefits
as if the money is earned income. State taxes vary. Most states fully tax
benefits, also, but there are some states with no income tax and a couple that
only partially tax benefits.
¨ New
Eligibility for Tax Breaks- People who many not ever have been previously
income-eligible for certain tax breaks may qualify this year due to
pandemic-related income losses. Two examples are the Earned Income Tax Credit (EITC), with 2020 income
limits from $21,710 to $56,844, depending on the number of qualifying children
claimed, and the Saver’s Credit with AGI limits
under $32,500 for singles and $65,000 for joint filers.
¨ Early
Filing- Experts advise filing tax returns as quickly as possible. Not only will
this get a refund (if any) in your hands faster, but it is a recommended step
to protect yourself from refund delays resulting from tax identity theft if a
fraudster with stolen data files a false tax return in your name before you
file one yourself.
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