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December 12, 2020

What You Need to Know About Your 2020 Taxes By JEFF STIMPSON

This is article is originally from Investopedia.com

As Americans deal with the COVID-19 pandemic, it's not too early to look ahead to the 2020 tax year filing season including the impact of existing and recent legislation on how you will file in 2021.

In addition to several changes brought on by coronavirus-related legislation, other changes for the 2020 tax year were set to happen anyway. These include new standard deduction amounts, 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.1

Tax year 2020 quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can be delayed until July 15 without penalty.2

Stimulus Payments

Your $1,200 ($2,400 for couples) stimulus payment, officially known as a "Recovery Rebate," is an advance refundable tax credit on 2020 taxes. This means no matter how much you owe (or don't owe) in taxes for the 2020 tax year, you get to keep all the money with no taxes due on it.3

Since the stimulus payment will either be based on your adjusted gross income (AGI) for 2018 or 2019, but technically applies to your 2020 AGI, there may be some discrepancy.3 Don't worry. The news there is good as well.

If it turns out your AGI for 2018 or 2019 (whichever one the IRS bases your stimulus payment on), is lower than 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.4 5 6

Finally, your recovery rebate is not taxable. It will not add to your taxable income in 2020 (or any other year).5 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.3


KEY TAKEAWAYS

Recently passed coronavirus legislation has added to tax law changes already set to take place for the 2020 tax year.1

Although stimulus payments are related to your income in 2020, built-in safeguards minimize the impact on your taxes.5

The standard deduction for those married filing jointly rose to $24,800 for tax year 2020, up $400 from 2019.1

Income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have all increased for 2020.7

An important change lets you deduct $300 in charitable contributions "above-the-line."8 3

Changes relaxing retirement account withdrawals and RMDs are designed to help.1

Estates of decedents who die during 2020 have a basic exclusion amount of $11.58 million, up from $11.4 million from the year prior.1

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 2019.9 The income threshold for this rate will be $622,050 for married couples filing jointly (MFJ) and $311,0215 for married individuals filing separately (MFS).10 1


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 $19,750.1


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.1 10


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.10

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