6 Changes to Watch For In Your 2020 Taxes
Even though tax season has just ended, now is the time to start thinking about your next tax return, due April 2020. It has always a good idea to be proactive when it comes to tax planning, but it is particularly important this year.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides individual taxpayers with several new tax breaks, most of which will only be available this year, so keep his in mind in addition to inflation when you are going over your return. The sooner you learn about the different forms of tax-savings available, the more time you will have to take advantage of them.
Here are 6 ways your 2020 return will differ from prior years:
- Waived RMDs
You are typically required to take an annual required minimum distribution (RMD) from your IRA, 401(k), or other tax-deferred retirement account starting in the year when you turn 72, but the CARES Act temporarily waived the RMD requirement for 2020. The waiver also applies if you reached age 70½ in 2019, but waited to take your first RMD until 2020, as allowed under the SECURE Act.
RMDs generally count as taxable income, so taking this waiver means that you may have lower taxable income in 2020 and therefore owe less income taxes for 2020.
Remember to also consider the state of the market and your living expenses when deciding whether or not to waive your RMDs. It is safest to consult with us or your tax professional before making your final decision.
- Higher standard deduction
If you do not itemize deductions, you can use the standard deduction to reduce your taxable income. Trump’s tax reform legislation nearly doubled the standard deduction starting in 2018, and it has increased even more for inflation since then. For 2020, the new standard deduction amounts include the following:
- $12,400 for single filers
- $24,800 for those who are married filing jointly
- $18,650 for people filing as a head of household
- Higher contribution limits for certain retirement accounts
Certain types of retirement accounts have increased the maximum amount you can contribute for this year, so check to see if any of yours apply. The contribution limit for a 401(k) or similar workplace-retirement plan has increased from $19,000 in 2019 to $19,500 in 2020. If you are 50 or older in 2020, the 401(k) catch-up contribution limit is $6,500, up from $6,000.
On the other hand, the amount you can contribute to a traditional IRA remains the same for 2020: $6,000, with a $1,000 catch-up limit if you’re 50 or older. However, if you made too much money to contribute to a Roth IRA last year, the maximum income limits for contributing to a Roth have increased, so you may be able to contribute in 2020.
In 2020, eligibility to contribute to a Roth IRA starts to phase out at $124,000 for single filers and $196,000 for married couples filing jointly. Those phase-out limits are up from 2019, which started at $122,000 for single individuals and $193,000 for married couples.
- New charitable deduction
Now normally you are only able to deduct charitable donations on your income tax return when you itemize deductions. However, the CARES Act included a provision to allow everyone to claim up to a $300 “above-the-line” deduction for charitable contributions, if you take the standard deduction in 2020. This change was designed to encourage people to donate money to charity to help with COVID-19 relief efforts.
- Adoption credit changes
If you adopted a child this year, you can claim a higher tax credit on your 2020 return to cover your adoption-related expenses such as adoption fees, court and attorney costs, and travel expenses. The maximum credit amount for 2020 is $14,300, which is an increase of $220 from last year.
- New rules for early withdrawals from retirement accounts
Taking into account that your finances could seriously impacted by the coronavirus, new rules under the CARES Act you now have more flexibility to make an emergency withdrawal from tax-deferred retirement accounts in 2020, without incurring the normal penalties. This is to help you if you are in dire need of funds to cover your expenses.
Ordinarily, permanent withdrawals from traditional IRAs or 401(k) accounts are taxed at ordinary income rates in the year the funds were taken out and pulling out money before age 59 1/2 would also typically cost you a 10% penalty.
But thanks to the CARES Act, you can avoid the 10% penalty (if under 59 1/2) on up to $100,000 in coronavirus-related distributions (CRDs) from your retirement account. You are also allowed to spread such distributions over three years to reduce the tax impact, or better yet, you can opt to put this money back into your retirement account—also within three years—and avoid paying taxes on the money all together.
That said, emergency withdrawals are only available to those individuals with a valid COVID-19-related reason for early access to retirement funds. These reasons include:
- Being diagnosed with COVID-19
- Having a spouse or dependent diagnosed with COVID-19
- Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare due to COVID-19
- Have had a job offer rescinded or a job start date delayed due to COVID-19
- Experiencing adverse financial consequences due to an individual or the individual’s spouse’s finances being affected due to COVID-19
- Closing or reducing hours of a business owned or operated by an individual or their spouse due to COVID-19
Because early withdrawals can negatively impact your retirement savings down the road, if you are looking to take advantage of this provision you should consult with us and your financial advisor first. Also note that employers are not required to participate in this provision of the CARES Act, so you’ll also need to check with your plan administrator to see if it’s available at your workplace.
Maximize tax-savings for 2020
While the deadline for filing your 2020 income taxes isn’t until April 15, 2021, with all of the new COVID-19 legislation, the earlier you start planning your taxes, the better. Consult with us, as your Personal Family Lawyer®, for support in clarifying how these new changes will affect your return and to implement strategies to maximize your tax savings for 2020 and beyond.
This article is a service of Levi Alexander, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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