The COVID pandemic of 2020 has allowed for many changes in the current tax laws. Below is a recap of some of the significant changes that you, your accountant, and your business might want to be aware about.
The year 2020 has brought many challenges and tax changes. In late 2019, a law was passed which included many of the long-anticipated “tax extenders” and significant changes to retirement accounts. Due to the pandemic, many other tax provisions were implemented through the CARES Act and FFCRA in an effort to help lessen the financial impact felt by individuals and businesses.
Several provisions that allowed for deductions and credits expired at the end of 2017. Many of the provisions have been extended for 2020 and also made retroactive for 2018 and 2019. Some of the more popular provisions include the above-the-line deduction for tuition and fees, the deduction for mortgage insurance premiums, and the Residential EnergyCredit.
The TCJA applied trust and estate tax rates to a child’s unearned income above certain levels. This change was repealed for 2020 and beyond. The Kiddie Tax reverts to the old rules where a child’s income is taxed at the parent’s marginal rate. For 2018 and 2019, a choice exists for using the trust and estate tax rates or the parent’s marginal rate.
Two of the more notable changes in the SECURE Act include the repeal of the maximum age for making contributions to an IRA and increasing the beginning age for mandatory distributions from an IRA. Starting in 2020, you can make deductible contributions to an IRA at any age provided all requirements are met. For distributions required to be made after December 31, 2019, if you reach the age of 701⁄2 after this date, the required beginning age is increased from 701⁄2 to 72. Note: The CARES act waived all RMDs for 2020. The SECURE act also reduced the floor for deducting medical expenses to 7.5% of AGI for 2020 and 2021.
The CARES Act provides for direct payments (economic impact payments) based on your filing status and AGI. Payments are $1,200 for individuals, $2,400 for married couples, and $500 for each qualifying child. The payments phase out for AGIs above certain limits. The payments are based on filing status and income from either 2019 or 2018 tax returns. The economic impact payment is considered an advance credit against 2020 tax. The payment will not reduce your refund or increase any amount owed on your 2020 return. If you received an economic impact payment, the payment will be reconciled on your 2020 tax return. You will receive an additional credit on your return if your filing status and income level in 2020 qualifies you for a larger payment. If your filing status and income level in 2020 would reduce your payment, you do not have to repay any amount received. The CARES Act also allows you to deduct up to $300 in charitable contributions even if you take the standard deduction.
Federal and State Differences.
When it comes to taxes, most of what you read and hear from the media has to do with federal tax law. Remember that each state has its own tax law and just because something is not allowed for federal taxes (or you do not qualify) does not mean that you are not able to include it on your state tax return.