What are the Changes for Tax Year 2020?

2020 tax changes

It’s never too early to think about next year’s taxes.

Americans should keep their eyes open for the 2020 tax changes. In order to file your 2020 tax return, it’s important to prepare for what’s next. The IRS has released a draft of the 2020 tax instructions.

Here’s a quick list of the 2020 tax changes to be in tune with the 2021 tax season.

Is our stimulus package taxable?

As a reminder, the economic impact payment is not taxable for the 2020 tax year. It will not count towards your tax return.

Recovery rebate credit

If you did not receive your stimulus payment or received a reduced amount, this credit may be for you. Here are the requirements below:

  • You didn’t receive an economic impact payment
  • Your economic impact payment was less than $1,200 ($2,400 if married filing jointly for 2019 or 2018) plus $500 for each qualifying child you had in 2020.

The credit is determined by your 2020 tax information. However, you cannot qualify for this credit if you already received an economic payment equal to $1,200 or $2,400 based on your filing status without qualifying children.

Standard Deduction

Compared to the 2019 tax year, the standard deductions will increase.

  • Single and married filing separately taxpayers rises to $12,400 in for 2020, up $200 compared to 2019
  • Married filing jointly rises to $24,800 for tax year 2020, up $400 from the prior year
  • Heads of households rises to $18,650 for tax year 2020, up $300 from last year

As a reminder, personal exemptions are still eliminated until 2025 due to the Tax Cuts and Jobs Act.

Tax Bracket

The highest tax rate remains in place at 37% for individual single taxpayers exceeding $518,400 and $622,050 for the married filing jointly status. Here are the other rates.

  • 35% – Incomes exceeding $207,350 ($414,700 for married couples filing jointly);
  • 32% – Incomes over $163,300 ($326,600 for married couples filing jointly);
  • 24% – Incomes over $85,525 ($171,050 for married couples filing jointly);
  • 22% – Incomes over $40,125 ($80,250 for married couples filing jointly);
  • 12% – Incomes over $9,875 ($19,750 for married couples filing jointly);
  • 10% – Incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

Estimated Tax Payments

On form 1040 or 1040-SR, estimated tax payments are now on line 26. Previously, it was reported on Schedule 3, line 8.

Charitable Contributions

If you don’t itemize your deductions on Schedule A (Form 1040), you may qualify to take a deduction for charitable contributions of up to $300.

Deductible IRA contributions.

In order to take a deduction for your contribution to your IRA, you no longer need to be younger than 70 1/2.

Coronavirus tax relief for certain individuals

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows some individuals to defer the payment of 50% of the social security tax imposed for the period beginning on March 27, 2020, and ending December 31, 2020. However, they must file Schedule SE or Schedule H.

As a reminder, if you paid cash wages to a household employee and federal income taxes were withheld (such as social security, Medicare, or FUTA taxes) you must use Schedule H.

The deferral will be reported on Schedule 3, line 12e.

Alternative Minimum Tax (AMT)

The AMT exemption amount is $72,900 and phases out at $518,400 for individual taxpayers. However, for joint filers, it’s $113,400 and begins phasing out at $1,036,800.

The 2019 exemption amount was $71,700 and began to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption began to phase out at $1,020,600).

Earned Income Credit (EIC)

The maximum EIC amount is $6,660 for taxpayers who have three or more qualifying children. Compared to the 2019 tax year, it went up from $6,557.

Contributions to HSA

For the taxable years beginning in 2020, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.

HSA/MSA Limitation

For HSA and MSA accounts, there are changes in the annual deductible as well as maximum out-of-pocket expenses compared to tax year 2019.

  • Self-only coverage – The annual deductible must be in between $2,350 to $3,550; an increase of $50 from 2019
  • Self-only coverage – The maximum out-of-pocket expense amount is $4,750; a rise of $100
  • Family coverage – The annual deductible is $4,750, an increase of $4,650; but, the deductible cannot exceed $7,100, a rise of $100
  • Family coverage – The out-of-pocket expense limit is $8,650; a rise of $100

Lifetime Learning Credit

For joint filers, the adjusted gross income (AGI) amount used for the Lifetime Learning Credit is $118,000, a $2,000 increase from 2019.

Estates

The basic exclusion amount for estates of decedents who die during 2020 is $11,580,000. This went up from $11,400,000 for the 2019 tax year.

Adoption Credit

The amount of qualified adoption expenses raise to $14,300 in comparison to $14,080 for the 2019 tax year.

Stay prepared for next tax season

Although it may seem like the next tax season is light years away, we advise you stay up to date with the 2020 tax changes so your tax return isn’t a surprise.

Our 2020 tax application will be launched on January 1st. All you need to do is create an account, ensure that you gather your income statements so you can enter your tax information, and submit your account for e-file when tax season rolls around.

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