Things to Know for the Current Tax Year

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Things to Know for the Current Tax Year


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:

  • Taxpayers who did not receive the first EIP payment ($2,400 – MFJ) or $1,200 for all other filing status’
  • Taxpayers who did not receive their second EIP payment ($1,200 – MFJ) or $600 for all other filing status’
  • Taxpayer did not receive a $500 for the first EIP payment and/or $600 for the second EIP payment for all of their eligible children
  • The taxpayer’s economic stimulus payment was limited based on their income on their 2018 or 2019 return and their 2020 income is below the income phase out or income limit for the credit.

See the Recovery Rebate Credit page on the IRS website for more information.

Earned Income Tax Credit and Child Tax Credit Change

  • Individuals whose 2020 earned income is less than their 2019 earned income have the option of using the 2019 amount to calculate their 2020 Earned Income Tax Credit and/or their Child Tax Credit.

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

  • For qualified COVID-19 distributions, an individual can withdrawal funds (up to $100,000) from a retirement account free of the 10 percent early withdrawal penalty and can spread the taxable portion on that distribution over a three year period.
  • Any qualified COVID-19 withdrawal will not be taxable if it is recontributed within three years of the date of distribution.
  • Increases the maximum loan amount for COVID-19 purposes to $100,000.

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:

  • Must exceed $500 in order to take a deduction
  • Removes the requirement that the loss exceed 10% of AGI
  • May be taken as an itemized deduction or as an increase in a taxpayer’s standard deduction.

Retirement Fund Provisions

  • For qualified federal disaster distributions, an individual can withdrawal funds (up to $100,000) from a retirement account free of the 10 percent early withdrawal penalty and can spread the taxable portion on that distribution over a three year period.
  • Any qualified federal disaster relief withdrawal will not be taxable if it is recontributed within three years of the date of distribution.
  • Increases the maximum loan amount for qualified federal disaster relief to $100,000.
  • Allows for re-contribution of retirement plan withdrawals for cancelled home purchases or construction of a principal residence due to a federally declared disaster.

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 Deduction:
Basic:

  • Single/MFS: $12,400
  • MFJ/Qualifying Widow(er): $24,800
  • Head of Household: $18,650

Standard Mileage Rates

  • 57.5 cents per mile - Business purposes (up to four vehicles
  • 17 cents per mile - Medical/Moving purposes
  • 14 cents per mile - Charitable purposes

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:

  • Tuition and Fees Deduction (Form 8917/Form 1040, Schedule 1, line 21)
  • Medical expense deduction floor remains at 7.5% of AGI
  • Exclusion of gain from income of foreclosed home mortgage debt (Form 982, line 1e)
  • Ability to treated mortgage insurance premiums as qualified mortgage interest (Schedule A, line 8d)
  • Nonbusiness Energy Property Credit – Form 5695, Part II

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.

PTIN Fee
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:

  • If the individual’s AGI on their most recent federal return was $72,000 or less, they will file Form 15227 (Application for an Identity Protection Identification Number) which will be available beginning in January, 2021.

    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.

  • If their AGI is greater than $72,000 they will have to call IRS and make an appointment at an IRS Taxpayer Assistance Center. They will then verify their identity in person and will then receive an IP PIN that can be used when filing their 2020 federal return during the 2021 filing season. The IRS will mail them their PIN and they should receive it within three weeks.

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 Reminder

IRA Contribution Limits for 2020

  • $6,000 – Under Age 50
  • $7,000 – Age 50 and Older

IRA Changes
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

  • Net operating losses that occur in 2018, 2019 or 2020 can be carried back 5 years
  • These NOLs can fully offset income in the prior years
  • Applicable to individuals and corporations
  • Temporarily suspends the loss limitation of $250,000 ($500,000 for joint filers) for non-corporate taxpayers for losses arising in 2018, 2019 and 2020.

Business Interest Limitation Changes

  • For 2019 and 2020 the interest expense that businesses are allowed to deduct is increased to 50% of taxable income.

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:

  • Operations were fully or partially suspended due to the COVID 19 crisis

    or

  • Gross receipts declined by more than 50% compared to the same quarter in the prior year

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.