Congress hasn’t passed a major tax reform in 2020, but it still makes many fundamental changes to US tax law. Many of these changes were included in legislation passed to boost the economy suffering from the COVID-19 pandemic.
New changes are on Tax lawCombined with regularly scheduled cost-of-living adjustments, Americans will see some changes to their 2020 personal income tax returns this spring. Taxpayers should be aware of these changes and understand how they will affect the amount of tax owed and future tax planning.
The IRS has moved to the 2021 application deadline
The Internal Revenue Service has taken steps to ease the financial burden for the 2021 tax season by pushing back the deadline for submitting 2020 returns from April 15th to May 17th. pandemic.
This is the second year in a row that the IRS has postponed the application deadline after moving it to July 15, 2020, for the 2019 individual tax returns.
The May 17 filing extension does not apply to the assessed tax payments, which are still due on April 15.
The stimulus payments were, in fact, tax credits
The IRS released two rounds of direct economic Stimulus Payments To taxpayers in 2020 as part of COVID-19 relief packages. What most taxpayers who got “economic impact payments” didn’t notice is that they were actually tax deductions for the 2020 redemption rebate to be paid early. Because tax credits are not taxable as income, you will not pay federal income tax on rebate deduction credits received in 2020.
If you have already received the full amount of your debit recovery credit, you do not need to claim it on your 2020 tax return. But if you qualify for the credit and either haven’t received it or the amount has not been paid in full, you will need to file a federal income tax return for the year 2020 to claim credit, even if you are not required to file a return for 2020.
Standard discount has been increased
Most taxpayers who do not separate from their federal income tax deductions qualify for the Standard discount. The size of the discount varies depending on your enrollment status, but is adjusted for inflation each year. For the 2020 tax year, the IRS has increased the standard deduction by the following amounts:
- Individual taxpayers or married taxpayers file separately: From $ 12,200 for 2019 to $ 12,400 for 2020
- Married taxpayers: $ 24,400 to $ 24,800
- Household heads: $ 18,350 to $ 18,650
New deduction for charitable contributions
To encourage people to donate to charity during the pandemic, 2020 The Aid, Relief and Economic Security Act (CARES) in cases of Coronavirus Adding a clause to the tax code allows taxpayers who claim the standard deduction to claim an additional deduction of up to $ 300 in donations. Typically, taxpayers who claim a standard deduction cannot claim a deduction for charitable contributions, but CARES Act allows for a deduction for cash donations made in 2020.
Suspension of early withdrawal penalties
The CARES Act allowed individuals affected by COVID-19 to withdraw up to $ 100,000 from 401 (k) retirement accounts or other tax benefit retirement accounts during 2020 without paying a 10% early withdrawal penalty. In most years, if you withdraw funds from a retirement account before you turn 59, you will be subject to an early withdrawal penalty of 10%.
You will still be required to pay federal income tax on the amounts you withdraw, but you can spread your payments over three years. For example, if you are under the age of 59 and withdraw $ 9,000 from a retirement account to cover expenses after you are affected by COVID-19, you can include $ 3,000 of that amount in your income for 2020, $ 3,000 in your income for 2021, and $ 3,000. In your income for 2022.
Instead of paying tax on early withdrawals, the taxpayer also has the option to contribute the amount withdrawn to the retirement plan within three years, and the transaction will be treated as a direct extension.
Certain provisions ending for 2020 have been extended
Congress passed Taxpayer Exemption from Certainty and Disaster Tax Act In December 2019 to extend more than 30 provisions of the tax law that have expired so that they are available to taxpayers for the year 2020. The extended provisions that expired at the end of 2020 included the following:
- Deduction of mortgage insurance premiums
- Deduction of higher education fees
- Exclusion from gross income to discharge debt income from the main eligible residence debt
- Non-commercial energy property credit