Below are details on the following federal tax provisions that have changed for calendar year 2020, including the CARES Act, Families First Coronavirus Relief Act and in the 2021 Appropriations legislation.
Federal Individual Tax Law Changes
Here is a summary of the federal tax law changes that will affect 2020 individual federal returns:
Recovery Rebate Credit
This is a refundable credit for those taxpayers who did receive the full amount of the 1st economic impact (stimulus) payment in 2020 and/or the 2nd economic impact in January of 2021 for themselves, their spouse (if applicable) and their qualifying children.
The credit appears on new line 30 of the 2020 Form 1040/1040SR and the calculation is based on the worksheet included on page 59 of the 2020 Form 1040 instructions. The credit is calculated based on income, filing status and the number of qualifying children reported on the 2020 federal return.
For most taxpayers this credit will be calculated as zero since they received the full amount of both the 1st and 2nd economic impact payment (EIP) during 2020 and early 2021.
Taxpayers with the following circumstances will be eligible for this credit on their 2020 federal return:
See the Recovery Rebate Credit page on the IRS website for more information.
Earned Income Tax Credit and Child Tax Credit Change
Charitable Contribution – Above the Line Deduction
For 2020 a taxpayer who does not itemize may deduct up to $300 of cash charitable contributions as an adjustment to income on the 2020 Form 1040, line 10b.
Noncash property and contributions carried forward from prior years do not qualify for this deduction.
The maximum deduction is $300 per return ($150 for MFS).
2020 Modification of Limitation on Charitable Contributions
The 50 percent of AGI limitation is suspended for 2020
Retirement Distributions Related to COVID-19
Credits for Sick and Family Leave for certain Self-Employed Individuals
This new credit is for self-employed individuals who were unable to perform services as a self-employed individual because they were affected by the coronavirus or they had to care for someone who was affected by the coronavirus.
For sick leave the self-employed individual may claim up a credit up to 10 days for themselves or when they care for someone else. The credit for themselves is up to $511 per day for a maximum credit of $5,110. The credit for caring for someone else is up to $200 per day for a maximum credit of $2,000.
For family leave the self-employed individual may claim a credit for up to 50 days if they had to care for a son or daughter under 18. Credit is up to $200 per day for a maximum credit of $10,000.
The period covered is April 1 – December 31, 2020 and the credit is claimed on new Form 7202. The credit is then transferred to Form 1040, Schedule 3, line 12b.
For more details see the Form 7202 instructions.
Disaster Relief Provisions
The following disaster relief provisions are available to taxpayers that were affected by a federally declared disaster that occurred in 2020:
Deduction for Personal Casualty Losses
Uncompensated losses that occurred in a federally declared disaster area:
Retirement Fund Provisions
Charitable Contributions for Disaster Relief
Suspends the limitation on charitable contributions associated with a federally declared disaster that are made in 2020.
Payroll tax (social security portion) Deferral
New tax provision that permits self-employed individuals to delay paying 50% of the social security tax imposed for the period beginning March 27, 2020 and ending December 31, 2020.
Deferred tax is payable in the following two years with half paid in 2021 and half paid in 2022.
For self-employed individuals – Taxpayer can make an election to defer this tax on the 2020 Schedule SE, Part III .
The amount of tax that can be deferred may be limited by the amount of tax that the self-employed individual paid in estimated taxes during 2020. This calculation will be done on a worksheet in the 2020 1040 instructions for Schedule 3, line 12e.
Changing or inflation adjusted provisions for 2020
Standard Mileage Rates
Extender Provisions still in effect for 2020
Here are some of the most relevant for individual extender provisions for most taxpayers that will expire at the end of 2020 and therefore may still be used when preparing a 2020 federal return:
See the 2019 IRS Publication 17 (Tax Guide for Individuals) – Impact of New Legislation section for a full list of the extended provisions that are applicable through tax year 2020.
This is a reminder that the IRS is beginning to charge a fee of $35.95 for renewing or requesting a new PTIN beginning for calendar year 2021.
For more information see the PTIN Requirements for Tax Return Preparers on the IRS website.
IP PIN Change
Beginning in early 2021 the IRS is expanding who may opt into the IP PIN program to include all individuals regardless if they have been victims of identity theft.
Eligible individuals will be able to request an IP PIN using the Get an IP PIN tool on the IRS website beginning in January 2021. If they do not already have an account on IRS.gov, they must validate their identity by registering and going through the IRS Secure Access identity authentication process.
For those individuals that cannot authenticate themselves online they will need to do one of the following in order to opt-in to receive an IP PIN:
An IRS assistor will then call the individual to verify their identity. Once this is done the IRS will issue them an IP PIN for the 2022 filing season.
For more information on the IP PIN program see the following on the IRS website:
Kiddie Tax Change for 2020 and beyond
The Tax for Certain Children Who Have Unearned Income that is reported on Form 8615 was changed in the Secure Act which was included in the 2020 Appropriations legislation enacted on December 20, 2019.
Effective for tax years beginning in 2020 the kiddie tax reverts back to the rules that were in effect before 2018. Therefore the tax will be determined using the tax rate of the parent.
Individual Retirement Account Reminder and Changes
The SECURE Act that was included in the 2020 Appropriations legislation that was enact in December 2019 included changes to the rules for contributions and distributions for IRAs. Here are the most relevant changes and a reminder of what the IRS Contribution limits are for 2020.
IRA Contribution Limits for 2020
The SECURE Act that was included in the Appropriations legislation that was enacted in December 2019 included the following changes that affect IRA contributions and withdrawals that begin in 2020.
Age restriction on traditional IRA contributions has been eliminated
For tax years beginning in 2020 an individual may make contributions to a traditional IRA after reaching age 70 1/2.
Required Minimum Distribution Age has been increased to 72
For individuals who reach 70 ½ after 2019 they will not have to begin taking a required distribution until they become 72.
If an individual turned 70 ½ before 2020 they still would have to begin taking a required distribution when they reached 70 ½.
Additional penalty exemption for some distributions prior to age 59 ½
Starting in 2020 distributions prior to age 59 1/2 of up to $5,000 from a retirement plan that are used to pay expenses for child birth or adoption will not be subject to the 10% early distribution penalty.
Allows contributions to traditional IRA for 70 ½ and beyond
Provided an individual has earned income they can make a contribution to a traditional IRA after they reach 70 ½.
For more information see the following on the IRS website:
Federal Business Tax Law Changes
The following is a summary of the federal business tax law changes:
Qualified Improvement Property – Technical Amendment
Allows qualified improvement property to be depreciated over 15 years and be eligible for bonus depreciation. This is a retroactive change which means that taxpayers can amend their 2018 and 2019 returns for eligible qualified improvement property.
Net Operating Loss Changes
Business Interest Limitation Changes
Employee Retention Credit
Legislation provides eligible employers a refundable payroll tax credit equal to 50% of qualified wages paid to employees. Eligible employers must have carrying on a trade or business in calendar year 2020 whose:
For employers with greater than 100 full-time employees, qualified wages are wages paid to employees (between March 12, 2020 and December 31, 2020) when they are not providing services due to COVID-19 circumstances.
For employers with 100 or fewer full time employees, all employee wages qualify for the credit.
The credit is capped at the first $10,000 of compensation, including health benefits, paid to the employee. The credit is refundable to extent it exceeds the employer portion of social security taxes reduced by paid sick leave and paid extended FMLA established by the Families First Coronavirus Response Act.
Eligibility for the credit begins in the first in which the employer’s gross receipts declined by greater than 50% of the corresponding calendar quarter of the prior year, and ends with the quarter following the calendar quarter in which the gross receipts excess 80% or corresponding calendar quarter in the prior year.
For more information see the FAQs: Employee Retention Credit page on the IRS website.