It’s honest to say that 2020 was a blur. And the delay of final yr’s tax submitting deadline most likely makes it really feel such as you simply submitted your return for 2019. However right here we’re once more: Tax season has formally kicked off, and there are some massive updates.
There have been many modifications to the tax code for 2020, however just a few are notably related to most taxpayers. Listed below are among the key tax modifications it’s best to know as you file your taxes this yr.
The usual deduction elevated.
Some individuals itemize their taxes, which means they declare particular person tax deductions that apply to their monetary state of affairs and write off the entire quantity from their taxable revenue. Nevertheless, you solely itemize in case your particular person tax deductions exceed the usual deduction.
About 90% of taxpayers qualify to take the usual deduction. This deduction reduces your taxable revenue a hard and fast quantity, relying in your tax submitting standing. It’s set annually and adjusted for inflation. And for tax yr 2020, the usual deduction was elevated, permitting you to cut back your taxable revenue a bit greater than you probably did in 2019.
This yr, the usual deduction for single taxpayers and people married submitting individually is $12,400, up from $12,200 the earlier yr, in accordance with Arnold van Dyk, an lawyer and director of tax providers at TaxAudit. For married taxpayers submitting collectively, it has been raised from $24,400 to $24,800, and for heads of households, it was elevated from $18,350 to $18,650.
Contribution limits for well being financial savings accounts went up.
Sure tax-advantaged financial savings accounts have caps on how a lot you’ll be able to contribute annually. These maximums improve over time, and final yr, that was the case for well being financial savings accounts.
So why does that matter now? If you happen to didn’t max out your contributions in 2020, you may have till April 15 of this yr to take action.
HSA contribution limits have been raised modestly. You possibly can contribute as much as $3,550 for your self, or $7,100 for households for tax yr 2020 (these limits have been beforehand $3,500 and $7,000, respectively). The annual “catch-up” contribution quantity for people age 55 or older will stay at $1,000, van Dyk famous.
There’s a brand new “lookback rule” for sure tax credit.
Many individuals had modifications to their employment and revenue in 2020 because of the pandemic, which implies they might qualify for decrease quantities of sure credit. Nevertheless, a brand new “lookback rule” established final December could enable taxpayers who qualify for the Earned Revenue Tax Credit score (EITC) or the Further Little one Tax Credit score (ACTC) to get more cash again throughout a very powerful yr.
This new rule permits sure taxpayers to “look again” at their 2019 revenue and declare these credit based mostly on that yr’s earned revenue if it was increased than their 2020 earned revenue.
This doesn’t occur routinely, although. You or your tax preparer should evaluate the 2 years and select the choice that permits you to declare the biggest credit.
A brand new tax credit score for stimulus funds was created.
Tens of millions of Individuals acquired a stimulus test in 2020 as a part of a better coronavirus reduction bundle. That cash was really a tax credit score for 2020, paid out prematurely.
That’s why stimulus funds are usually not taxable ― they’re credit that cut back your taxable revenue for the yr. Nevertheless, for the reason that IRS didn’t have everybody’s 2020 tax returns, they based mostly the stimulus test quantities off of knowledge from 2018 or 2019 tax returns, whichever they’d on file that was most up-to-date.
Fortuitously, in case your monetary state of affairs modified since 2019 and also you acquired an excessive amount of stimulus cash based mostly in your 2020 revenue, you do not need to pay it again, says Lisa Greene-Lewis, a licensed public accountant and tax skilled for TurboTax.
Equally, should you acquired too little or a partial fee, you’ll be able to declare extra within the type of a restoration rebate credit score while you file your 2020 taxes, she added. “That goes for certified dependents you didn’t obtain stimulus funds for as nicely.”
For instance, should you had a child in 2020 and the IRS didn’t know that after they issued your stimulus fee, you’ll be able to declare the stimulus to your new dependent while you file.
An above-the-line charitable contribution deduction was added.
Often, you’ll be able to solely write-off donations to charity in your taxes should you itemize. Nevertheless, with the intention to encourage charitable giving in the course of the pandemic, a brand new provision beneath the CARES Act permits taxpayers who take the usual deduction to deduct as much as $300 in donations.
This deduction is accessible for 2020 solely and solely applies to money donations, together with checks and on-line funds. Donations within the type of garments, furnishings, provides and different gadgets don’t rely.
Greene-Lewis added that the CARES Act additionally quickly eradicated the restrict on the variety of money contributions you’ll be able to deduct should you itemize your deductions. “Often, money donations that you would be able to deduct are restricted to 60% of your adjusted gross revenue, however the CARES Act eliminates the restrict for tax yr 2020 returns,” she mentioned.
Penalties for retirement early withdrawals have been suspended.
Often, you aren’t allowed to take cash out of your 401(ok) or different retirement account earlier than you attain age 59 half of, in any other case you’re topic to taxes and different penalties. Nevertheless, one other change that resulted from the CARES Act was the elimination of the 10% early withdrawal penalty on as much as $100,000 in retirement funds withdrawn in case you are a professional particular person impacted coronavirus.
Moreover, as a substitute of getting to pay taxes on these withdrawals in 2021, you might be allowed to unfold the tax funds out over three years. “For instance, should you took a distribution of $30,000, you’d have the ability to embrace $10,000 in revenue annually over three years versus together with the complete $30,000 in revenue for tax yr 2020,” Greene-Lewis defined. You even have the choice of paying that cash again to your account, reducing your tax legal responsibility.
A number of vital tax provisions have been prolonged.
Along with the brand new tax modifications outlined above, the CARES Act additionally prolonged some tax provisions that have been set to run out in 2020. These are generally known as “tax extenders,” and the next are just a few vital examples, in accordance with Lewis:
- Taxpayers can deduct certified, unreimbursed medical bills which might be greater than 7.5% of their 2020 adjusted gross revenue. That threshold was set to extend from 7.5% to 10% in 2020, however the discount was completely handed.
- For tax years starting in 2020, volunteer firefighters and volunteer medical responders will have the ability to exclude funds offered state and native governments for performing emergency response from their revenue. That exclusion is everlasting.
- If you happen to skilled a foreclosures, brief sale or mortgage modification, you should still have the ability to exclude the quantity of debt forgiven in your principal residence in your taxes.
- The flexibility to put in writing off any mortgage insurance coverage premiums paid, that are included within the mortgage curiosity deduction, was prolonged via 2021.
- Credit for nonbusiness vitality property enhancements made to your own home (comparable to putting in energy-saving roofs, home windows, skylights, doorways, and so on.) have been prolonged via 2021. “The supply nonetheless permits you to declare the nonbusiness vitality property credit score for 10% of quantities paid for certified vitality effectivity enhancements, as much as a lifetime cap of $500,” Greene-Lewis mentioned.
Remember the fact that there are a lot of extra tax deductions and credit accessible to sure taxpayers who have been impacted the coronavirus in 2020. If you happen to misplaced your job, needed to look after a sick beloved one (or your self), grew to become self-employed or skilled another change to your monetary state of affairs, it’s a good suggestion to speak with a tax skilled about what help could also be accessible while you file.