7 Important Tax Changes For 2020 You Should Know When You File

7 Important Tax Changes For 2020 You Should Know When You File

It’s fair to say that 2020 was a blur. And the delay of last year’s tax filing deadline probably makes it feel like you just submitted your return for 2019. But here we are again: Tax season has officially kicked off, and there are some big updates.

There were many changes to the tax code for 2020, but a few are particularly relevant to most taxpayers. Here are some of the key tax changes you should know as you file your taxes this year.

The standard deduction increased.

Some people itemize their taxes, meaning they claim individual tax deductions that apply to their financial situation and write off the total amount from their taxable income. However, you only itemize if your individual tax deductions exceed the standard deduction.

About 90% of taxpayers qualify to take the standard deduction. This deduction reduces your taxable income by a fixed amount, depending on your tax filing status. It’s set each year and adjusted for inflation. And for tax year 2020, the standard deduction was increased, allowing you to reduce your taxable income by a bit more than you did in 2019.

This year, the standard deduction for single taxpayers and those married filing separately is $12,400, up from $12,200 the previous year, according to Arnold van Dyk, an attorney and director of tax services at TaxAudit. For married taxpayers filing jointly, it has been raised from $24,400 to $24,800, and for heads of households, it was increased from $18,350 to $18,650.

Contribution limits for health savings accounts went up.

Certain tax-advantaged savings accounts have caps on how much you can contribute each year. Those maximums increase over time, and last year, that was the case for health savings accounts.

So why does that matter now? If you didn’t max out your contributions in 2020, you have until April 15 of this year to do so.

HSA contribution limits were raised modestly. You can contribute up to $3,550 for yourself, or $7,100 for families for tax year 2020 (those limits were previously $3,500 and $7,000, respectively). The annual “catch-up” contribution amount for individuals age 55 or older will remain at $1,000, van Dyk noted.

There’s a new “lookback rule” for certain tax credits.

Many people had changes to their employment and income in 2020 due to the pandemic, which means they may qualify for lower amounts of certain credits. However, a new “lookback rule” established last December may allow taxpayers who qualify for the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) to get more money back during a particularly tough year.

This new rule allows certain taxpayers to “look back” at their 2019 income and claim these credits based on that year’s earned income if it was higher than their 2020 earned income.

This doesn’t happen automatically, though. You or your tax preparer will have to compare the two years and choose the option that allows you to claim the largest credits.

A new tax credit for stimulus payments was created.

Millions of Americans received a stimulus check in 2020 as part of a greater coronavirus relief package. That money was actually a tax credit for 2020, paid out in advance.

That’s why stimulus payments are not taxable ― they’re credits that reduce your taxable income for the year. However, since the IRS didn’t have everyone’s 2020 tax returns, they based the stimulus check amounts off of information from 2018 or 2019 tax returns, whichever they had on file that was most recent.

Fortunately, if your financial situation changed since 2019 and you received too much stimulus money based on your 2020 income, you do not have to pay it back, says Lisa Greene-Lewis, a certified public accountant and tax expert for TurboTax.

Similarly, if you received too little or a partial payment, you can claim more in the form of a recovery rebate credit when you file your 2020 taxes, she added. “That goes for qualified dependents you didn’t receive stimulus payments for as well.”

For example, if you had a baby in 2020 and the IRS didn’t know that when they issued your stimulus payment, you can claim the stimulus for your new dependent when you file.

An above-the-line charitable contribution deduction was added.

Usually, you can only write-off donations to charity on your taxes if you itemize. However, in order to encourage charitable giving during the pandemic, a new provision under the CARES Act allows taxpayers who take the standard deduction to deduct up to $300 in donations.

This deduction is available for 2020 only and only applies to cash donations, including checks and online payments. Donations in the form of clothes, furniture, supplies and other items don’t count.

Greene-Lewis added that the CARES Act also temporarily eliminated the limit on the number of cash contributions you can deduct if you itemize your deductions. “Usually, cash donations that you can deduct are limited to 60% of your adjusted gross income, but the CARES Act eliminates the limit for tax year 2020 returns,” she said.

Penalties for retirement early withdrawals were suspended.

Usually, you aren’t allowed to take money out of your 401(k) or other retirement account before you reach age 59 1/2, otherwise you’re subject to taxes and other penalties. However, another change that resulted from the CARES Act was the elimination of the 10% early withdrawal penalty on up to $100,000 in retirement funds withdrawn if you are a qualified individual impacted by coronavirus.

Additionally, instead of having to pay taxes on those withdrawals in 2021, you are allowed to spread the tax payments out over three years. “For example, if you took a distribution of $30,000, you would be able to include $10,000 in income each year over three years as opposed to including the entire $30,000 in income for tax year 2020,” Greene-Lewis explained. You also have the option of paying that money back to your account, lowering your tax liability.

Several important tax provisions were extended.

In addition to the new tax changes outlined above, the CARES Act also extended some tax provisions that were set to expire in 2020. These are known as “tax extenders,” and the following are a few important examples, according to Lewis:

  • Taxpayers can deduct qualified, unreimbursed medical expenses that are more than 7.5% of their 2020 adjusted gross income. That threshold was set to increase from 7.5% to 10% in 2020, but the reduction was permanently passed.
  • For tax years beginning in 2020, volunteer firefighters and volunteer medical responders will be able to exclude payments provided by state and local governments for performing emergency response from their income. That exclusion is permanent.
  • If you experienced a foreclosure, short sale or loan modification, you may still be able to exclude the amount of debt forgiven on your principal residence on your taxes.
  • The ability to write off any mortgage insurance premiums paid, which are included in the mortgage interest deduction, was extended through 2021.
  • Credits for nonbusiness energy property improvements made to your home (such as installing energy-saving roofs, windows, skylights, doors, etc.) were extended through 2021. “The provision still allows you to claim the nonbusiness energy property credit for 10% of amounts paid for qualified energy efficiency improvements, up to a lifetime cap of $500,” Greene-Lewis said.

Keep in mind that there are many more tax deductions and credits available to certain taxpayers who were impacted by the coronavirus in 2020. If you lost your job, had to care for a sick loved one (or yourself), became self-employed or experienced some other change to your financial situation, it’s a good idea to talk with a tax professional about what assistance may be available when you file.



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