While many of us are quick to say goodbye to 2020, we have some unfinished business. 2020 Taxes. Whether you’re dreading the bill or anticipating a refund, we’ve gathered the biggest changes you can expect when filing this year. Tax Day is still April 15, 2021, no change there.
INCOME BRACKETS AND RATES
Income tax rates and Capital Gains tax rates are at historic lows. Capital Gains tax can be as low as 0%. Aside from an increase or decrease in income, you can expect to be taxed a similar amount to last year as these rates remain the same for 2020. See full tax tables on the IRS Website.
HIGHER STANDARD DEDUCTIONS
Most Americans will use the Standard Deduction on their taxes. Those deductions, depending on filing status, were increased slightly for inflation. The Standard Deduction for Single filers is now $12,400 (up $200) and Married Filing Jointly rose to $24,800 (up $400).
Due to the high standard deductions, most people do not itemize their deductions. If you are unable to itemize, a “front page” deduction is available for up to $300 in 2020 for cash contributions to a qualified charity. A qualified charity would be your church, local community foundation, or school. If you give money to a family in need, this would be a very kind gesture, but would not qualify as a charity designated by the IRS. The deduction increases to $600 in 2021 for a married couple if you missed this in 2020.
CAN I DEDUCT MY HOME OFFICE?
Were you sent home to work because of COVID? Unfortunately, the Home Office Deduction is reserved for self-employed individuals only. No break there!
HOW DID THE PANDEMIC AFFECT MY TAXES?
- Stimulus Checks: Most of you have received two Economic Impact Payments from the government. These do not count as taxable income. The payments are considered a refundable tax credit, basically an advance on money the government would have given you on your taxes. Because they are refundable, the credit can come back to you if you paid in more taxes than you owe. Those who are eligible, but did not receive stimulus payments, will be able to file for the Recovery Rebate Credit on their 2020 Tax Return.
- Paycheck Protection Program (PPP) Loans: Many small businesses benefited from PPP Loans, created by the CARES Act to help them cover payroll and occupancy costs, among other expenses. These loans were designed to be forgiven through the Small Business Administration. In December, the IRS announced that any eligible expenses that were paid with money from a PPP loan can be deducted from your taxable income. Good news!
- Unemployment Benefits: The pandemic caused many workers to lose their jobs, at least temporarily. If you received unemployment benefits for time out of work, you will need to pay income taxes on that money. If you chose not to have taxes withheld from your unemployment payments, you’ll either have to sign up to pay quarterly estimated taxes or set aside the money to pay on Tax Day.
RETIREMENT PLANS
There were several changes to retirement plans that could affect your 2020 taxes.
- The CARES Act did allow those under 59 1/2 to take up to $100,000 out of their 401k and IRA accounts through the end of 2020 with no early withdrawal penalty. While that may have helped people make ends meet, withdrawals from tax-deferred retirement accounts are subject to income tax.
- If you own a traditional IRA, you are required to take money out of your account after a certain age. The good news is the SECURE Act pushed back the age for Required Minimum Distributions (RMD) from 70 1/2 to 72. The Act also allowed account holders to skip RMDs completely in 2020, with no penalty. This could be a big savings for those seniors who were able to skip the withdrawals, avoiding income tax.
- The SECURE Act also enabled traditional IRA owners to put money in their account past the age of 70 1/2. There is no maximum age to contribute to an IRA. The only requirement is you must have earned income. What is earned income? W-2 wages and earnings from self-employment is earned income. Interest, dividends, and capital gains is NOT earned income.
Facing a large tax bill due to a withdrawal from your retirement account? The good news if you can put the funds back into the account in 3 years, the IRS will refund the income taxes you paid on that money.
HEALTH SAVINGS ACCOUNTS
If you own, or your employer provides, a Health Savings Account (HSA) Insurance Policy, you may qualify to make contributions to a Health Savings Account. You can contribute up to $3,550 as a single and $7,100 for a family policy. This provides a way to set aside ‘tax-free’ money for future medical expenses. You do not lose these funds, even if you terminate employment. This is one of the best ways to pay for out-of-pocket medical expenses tax free. The savings can easily reach 25% or more. You have until April 15, 2021 to maximize your 2020 HSA contributions. Contact your tax professional if you need assistance.
COLLEGE SAVINGS IDEAS
An Indiana 529 College Savings account is a great way to save for future college expenses. The State of Indiana will give you a 20% credit on your taxes for the first $5,000 of contributions into the account each year. This is, up to, a $1,000 savings on your Indiana tax bill. 529 accounts may now also be used to repay student loans of up to $10,000 in a lifetime.
Have questions about your 2020 taxes? We encourage you to work with your tax professional to fully understand your circumstances and how these changes apply to your situation.
Jeff Milligan, CPA is President of Baker Milligan, Inc. The firm serves clients throughout the north central region of Indiana from their offices in Monticello and Logansport. Milligan and his team focus on client-centered service and proactive solutions. Jeff joined the Alliance Bancorp Board of Directors in 2020.
