2020 Tax Updates for Individuals

Stimulus payments are not taxable income:

Under the CARES Act, many Americans received economic recovery payments of up to $1,200 ($2,400 for married couples filing jointly), plus $500 more for each dependent child under age 17. The payments started to phase out for single filers with AGIs above $75,000, head of household filers with AGIs above $112,500 and joint filers with adjusted gross incomes above $150,000.

A second round of stimulus checks started going out in January 2021.

For most taxpayers, these payments were based on their most recently filed tax return. However, the payment was an advance on a 2020 tax credit. When you file your 2020 tax return, you need to reconcile the amount you received with your 2020 AGI. If the credit you calculate on your 2020 tax return is higher than the advance you received, you can claim the balance on your 2020 tax return. If your calculated advance is lower, you won’t have to repay the IRS.

The standard deduction inflation changes:

Taxpayers who don’t itemize deductions can claim the standard deduction, an amount predetermined by the IRS that reduces taxable income.

The standard deductions were increased for inflation in 2020:

  • Single and married filing separately filers: $12,400.
  • Married couples filing jointly: $24,800.
  • Head of household filers: $18,650.

Married taxpayers age 65 or older get an additional $1,300 per person for each spouse age 65 or older. For single filers and heads of household, the additional standard deduction is $1,650.

Claiming higher educational expenses:

Families paying for college have several options for claiming higher education expenses on their 2020 tax returns.

The Lifetime Learning Credit allows taxpayers to claim a tax credit worth 20% of up to $10,000 in college tuition and fees. However, you are limit to only credit per tax return. The AGI phaseouts increased for 2020:

  • Single filers: $59,000 to $69,000.
  • Married couples: $118,000 to $138,000.

The American Opportunity Tax Credit remains unchanged for 2020. Taxpayers can claim a tax credit for 100% of the first $2,000 and 25% of the next $2,000 of eligible higher education expenses, for a maximum credit of $2,500 per student. This credit is available to each qualified student on a tax return. The credit is phased out for AGIs between $80,0000 and $90,000 ($160,000 and $180,000 for married taxpayers filing jointly).

The tuition and fees deduction was revived for the 2020 tax year by the Further Consolidated Appropriations Act. This is an “above-the-line” deduction worth up to $4,000 in qualified higher education expenses. It goes away in 2021, in favor of higher income limits for the Lifetime Learning Credit.

The CARES Act also allowed employers to pay up to $5,250 in workers’ college loans without including the payments in wages through December 31, 2025. The $5,250 cap applies to both student loan payments and other educational assistance, such as tuition, fees, and books.

Congress also extended tax credits for residential energy efficiency through 2021. Homeowners can claim the Residential Renewable Energy Tax Credit, worth 26% of the cost of solar, fuel cell, small wind, and geothermal energy equipment through 2022. This is reduced to 22% for 2023 after which it is currently scheduled to end.

The Non-Business Energy Property Credit is worth 10% of the cost of qualified energy efficiency improvements up to $500, or a specific amount from $50 to $300.

Qualifying improvements include:

  • Air source heat pumps ($300 maximum)
  • Central air conditioners ($300 maximum)
  • Gas, propane or oil hot water boilers ($150 maximum)
  • Gas, propane or oil furnaces and fans ($150 maximum)
  • Non-solar water heaters ($300 maximum)
  • Advanced main air circulating fans ($50 maximum)
  • Biomass stoves ($300 maximum)

For Non-business Energy Property Credit, the improvements must be made to an existing home — not new construction — and the home must be the taxpayer’s principal residence. Vacation homes and rental properties don’t qualify.

Changes to retirement savings rules:

Two recent pieces of legislation made changes to the tax rules for retirement savings.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect on January 1, 2020. Here are the most significant retirement plan provisions that may affect your 2020 tax return:

    • The beginning age for taking required minimum distributions (RMDs) rose from 70½ to 72. This change only applies to account owners who turn 70½ in 2020 or later.
    • Owners of traditional IRAs can now make contributions past the age of 70½.
    • Taxpayers who have a baby or adopt a child can withdraw up to $5,000 from an IRA or 401(k) without having to pay the 10% penalty for early withdrawals. The withdrawn amount may still be taxable income.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in March of 2020. Here are the most significant retirement plan provisions that may affect your 2020 tax return:

  • Seniors may skip their required minimum distributions (RMDs) in 2020 without penalty. In a normal tax year, RMDs are required to be made and typically increase taxable income.
  • The 10% early withdrawal penalty is waived for up to $100,000 of COVID-19-related payouts. You have up to three years to put the money back in your retirement account and undo the distribution’s tax consequences.

Some retirement account contribution limits increased for 2020 as well. The maximum 401k contribution for 2020 is $19,500. People age 50 or older can make an additional “catch-up” contribution up to $6,500.

The contribution limit for traditional and Roth IRAs remained at $6,000 (plus an additional $1,000 for taxpayers age 50 and up). However, the income limit to contribute to a Roth IRA increased. For 2020, contributions phase out at an adjusted gross income (AGI) of $124,000 to $139,000 for single filers and $196,000 to $206,000 for couples.

The deduction phaseouts for contributions to traditional IRAs are a little more generous in 2020. The deduction phases out for single filers with AGIs between $65,000 and $75,000 ($104,000 to $124,000 for married couples filing jointly) if covered by a workplace retirement plan.

You typically have until the tax filing deadline to make IRA contributions for 2020.

Deducting mortgage insurance premiums:

The ability to deduct mortgage insurance premiums originally expired in 2017, but Congress revived it with the Further Consolidated Appropriations Act of 2020, making it available for 2018 through 2020. It was extended again – through 2021 – under the second stimulus package signed at the end of December 2020.

The deduction may be limited or phased out entirely if your AGI is more than $100,000 ($50,000 if married filing separately). You must itemize your deductions to claim this deduction.

Pass-through deductions will see higher income limits:

The pass-through deduction gives owners of certain sole proprietorships, partnerships, LLCs and S corporations a deduction worth up to 20% of their share of qualified business income.

The deduction may be phased out, depending on the owner’s total taxable income and the type of work they do. For taxes in 2020, that threshold is taxable income up to $329,600 for married taxpayers filing jointly or $163,300 for single taxpayers.

Charitable contributions were expanded:

You can deduct more charitable donations for 2020. The CARES Act suspended the 60% of AGI limitation on deductions for cash donations for people who itemize. For 2020, you can deduct contributions up to 100% of your AGI.

Taxpayers who take the standard deduction can also now write off up to $300 in charitable cash donations in 2020 regardless of filing status. This increases to $600 in 2021 for married filing jointly. This is a new “above-the-line” deduction for people who claim the standard deduction.

Self-employed workers will receive some tax relief:

The Families First Coronavirus Response Act passed in March of 2020 included tax relief for self-employed people who couldn’t work due to the pandemic.

The Sick Leave Tax Credit is good for up to 10 days total of sick leave during 2020. The credit is worth 100% of your average daily self-employment income, up to a maximum of $511 per day for days you couldn’t work because you:

  • Had COVID-19 symptoms and were seeking a medical diagnosis
  • Were subject to a federal, state, or local quarantine or isolation order related to the coronavirus
  • Were advised to self-quarantine by a health care provider

You can receive a credit of 67% of your average daily self-employment income, up to a maximum of $200 per day, for days you could not work because you:

  • Needed to care for a child because your child’s school or day care was closed or child care was unavailable due to the pandemic
  • Were caring for someone who was subject to a federal, state, or local quarantine or isolation order related to the coronavirus or who had been advised by a health care provider to self-quarantine due to coronavirus concerns

The Family Leave Tax Credit is good for up to 50 days of family leave. You can receive a credit for 67% of your average daily self-employment income, up to a maximum of $200 per day for days you couldn’t work because you needed to care for your child while their school or day care was closed or child care was unavailable due to COVID-19.

If you qualify, you can claim both credits, up to a maximum of 60 combined days.

Pursuant to US Treasury Department Regulations, you are advised that any information and advice, including any attachments and enclosures, may not be used for the purpose of (i) avoiding any tax liabilities and or penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to any other person(s) any tax-related matters addressed herein.
The above article is intended only to provide tax information on the changes to tax affecting the specific tax year as provided by the Internal Revenue Service and not to provide any legal, tax, investment, or any other bisiness advice to the taxpayer. Before taking any action, seek the assistance of a professional who is familiar with your specific situation for advice on any tax, legal, investment, or any other professional issues that may affect you or your business.