New Changes for 2020
New Changes for 2020
This past year has been a busy one on the tax legislation front with the following tax bills passed by Congress: Coronavirus Aid, Relief and Economic Security (CARES) Act; Families First Coronavirus Response Act; Setting Every Community Up for Retirement Enhancement (SECURE) Act; and the Taxpayer Certainty and Disaster Tax Relief Act of 2019.
High Impact Extender changes
Exclusion from gross income for discharge of debt income from qualified principal residence debt (expired after 2017, retroactively extended through 2020).
Deduction for mortgage insurance premiums (expired after 2017, retroactively extended through 2020). Tuition and fees deduction for higher education (expired after 2017, retroactively extended through 2020).
Nonbusiness energy property credit (expired after 2017, retroactively extended through 2020).
Medical expense deduction subject to 7.5% adjusted gross income threshold, instead of 10% (expired after 2018, extended for 2019 & 2020).
Economic Impact Payment: Stimulus Payment
Taxpayers also received a $1200 for each taxpayer and spouse having valid Social Security number and also $500 EIP for each qualifying child,. The payment is not includible in gross income, and will not reduce a refund or increase the amount owed.
Taxpayers who didn’t get some or all of the EIP they were entitled to will be able to claim the difference as a Recovery Rebate Credit on their 2020 tax return. According to the IRS, there is no provision in the law that would require individuals who qualify for a Payment based on their 2018 or 2019 tax returns, to pay back all or part of the payment, if based on the information reported on their 2020 tax returns, they no longer qualify for that amount or would qualify for a lesser amount.
Paycheck Protection Program Loans
The Paycheck Protection Program (PPP) provides low-interest loans to eligible small business owners and other eligible businesses (including nonprofits) to cover payroll and other expenses (mortgage interest, rent, and utilities) for a 24-week period. The Small Business Administration may forgive these loans, in whole or in part, if PPP funds are spent on eligible expenses during the Loan Forgiveness Covered Period. Lenders are responsible for determining loan forgiveness eligibility.
For tax purposes, loan forgiveness amounts are excluded from gross income, but forgiven expenses are not deductible (IRS Notice 2020-32). Lenders are not supposed to file and report forgiven amounts on Form 1099-C, Cancellation of Debt (Announcement 2020-12).
CAPITAL GAINS RATE
Tax rates on long-term capital gains and qualified dividends did not change for 2020, but the income thresholds to qualify for the various rates did go up. In 2020, the 0% rate applies for individual taxpayers with taxable income up to $40,000 on single returns ($39,375 for 2019), $53,600 for head-of-household filers ($52,750 for 2019) and $80,000 for joint returns ($78,750 for 2019).
The 20% rate for 2020 starts at $441,451 for singles ($434,550 for 2019), $469,051 for heads of household ($461,700 for 2019) and $496,601 for couples filing jointly ($488,850 for 2019).
The 15% rate is for filers with taxable incomes between the 0% and 20% break points.
The 3.8% surtax on net investment income stays the same for 2020. It kicks in for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.
Retirement plan distributions
There are a lot of changes in 2020 for retirement plans. Most of the changes come from the SECURE Act, which was signed into law late in 2019. However, the CARES Act includes a few provisions affecting retirement accounts, too.
The SECURE Act also allows owners of traditional IRAs to make contributions past the age of 70½ starting in 2020. In addition, folks having a baby or adopting a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay the 10% fine for pre-age-59½ withdrawals. Beginning in 2020, fellowships, stipends or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA contributions, too. This will help qualifying students begin saving for retirement sooner, since contributions to a retirement account generally can't exceed the amount of your compensation.
In addition to the RMD suspension mentioned above, the CARES Act includes a few other key retirement-related tax breaks for 2020. First, it waives the 10% penalty on pre-age-59½ payouts from retirement accounts for up to $100,000 of coronavirus-related payouts. A coronavirus-related distribution can also be included in income in equal installments over a three-year period, and you have three years to put the money back into your retirement account and undo the tax consequences of the distribution. Second, it allows eligible individuals to borrow more from workplace plans such as 401(k)s—up to the lesser of $100,000 or 100% of the account balance—until September 23, 2020. Repayments on retirement plan loans due in 2020 are also delayed for one year.
Many key dollar limits on retirement plans and IRAs are higher in 2020, too. The maximum 401(k) contribution for 2020 is $19,500, but those born before 1971 can put in $6,500 more (both amounts are $500 higher than in 2019). The caps apply to 403(b) and 457 plans as well. This year's cap on contributions to SIMPLE IRAs is $13,500 ($500 more than last year), plus $3,000 extra for people age 50 and up.
The 2020 contribution limit for traditional IRAs and Roth IRAs stays steady at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up. However, the income ceilings on Roth IRA contributions went up. Contributions phase out in 2020 at adjusted gross incomes (AGIs) of $196,000 to $206,000 for couples and $124,000 to $139,000 for singles ($193,000 to $203,000 and $122,000 to $137,000, respectively, for 2019).
Deduction phaseouts for traditional IRAs also start at higher levels in 2020, from AGIs of $104,000 to $124,000 for couples and $65,000 to $75,000 for single filers ($103,000 to $123,000 and $64,000 to $74,000 last year). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $196,000 of AGI and ends at $206,000 ($193,000 and $203,000 for 2019).
Retirement plan loans
Under the CARES Act and for taxpayers affected by COVID-19, loans from a qualified plan on or after March 27, 2020, and before Sept. 23, 2020, may be made up to the lesser of $100,000 (instead of $50,000) minus loans you have outstanding, or 100% of your non-forfeitable account balance or accrued benefit.
The taxpayer has up to six years (instead of five) to repay the loan. Amounts in IRAs are eligible for COVID-19-related distributions, but you can’t take a loan from an IRA.
For new and existing loans, plans can also suspend loan repayments due between March 27, 2020, and Dec. 31, 2020, for up to one year. Typically, at least those repayments originally scheduled for 2021 must resume in January 2021.
Repeal of maximum age for traditional IRA contributions
Under the SECURE Act and for contributions made for tax years beginning after 2019, individuals of ANY AGE can make contributions to a traditional IRA, assuming there is enough compensation. Prior to this rule change, taxpayers were not allowed to make an IRA contribution once they reached age 70½ by the close of the year. The rationale for the rule change is that Americans are living longer, and many are continuing to work past 70½ years old. The restriction didn’t apply to Roth IRA contributions.
For qualified charitable distributions (QCDs) made after 2019, the taxpayer’s QCD is reduced by the excess of the total amount of IRA deductions allowed after reaching age 70½, over the aggregate amount of reductions in prior years.
Penalty-free retirement plan withdrawals for births and adoptions
In general, retirement plan distributions are included in income, and unless an exception applies, distributions before the recipient turns 59½ years old are subject to a 10% early withdrawal penalty. Under the SECURE Act and beginning in 2020, taxpayers can take up to $5,000 (for each spouse) of penalty-free retirement plan distributions for expenses related to the birth or adoption of a child.
Cost-basis reporting no longer up to the taxpayer
Starting back with the 2011 tax forms, brokers or custodians of a person’s assets began tracking and reporting to the IRS the cost basis of those investments. In the past, it was up to the taxpayer.
Its purpose was to get investors to accurately report on tax forms any gains and losses on securities. The changes will eventually simplify tax preparation for investors, Nickell said.
Standard mileage rates down
The standard mileage rate for business use of a car, van, pick-up or panel truck is 57.5 cents for 2020. If the vehicle is operated for medical reasons, the rate is 20 cents a mile for 2020. The rate for using a vehicle to provide services to charitable organizations remains at 14 cents a mile.
- 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020,• 16 cents per mile driven for medical or moving purposes for qualified active duty members of the Armed Forces, down 1 cent from the rate for 2020, and
- 14 cents per mile driven in service of charitable organizations, the rate is set by statute and remains unchanged from 2020.
Savings accounts for medical -HSA
The additional tax on distributions from health savings accounts (HSA) not used for qualified medical expenses has increased to 20 percent, and payments for medicine are now considered qualified medical expenses only if the medicine is a prescribed drug or insulin.
Health insurance deductions
Eligible self-employed individuals may take a self-employed health insurance deduction in 2020. This deduction may be used not only for health insurance premiums that cover the filer, but also for spouses and other dependents as well as non-dependent children under the age of 27.
Forms 1099-MISC and 1099-NEC
To reduce confusion around filing deadlines, Form 1099-MISC (Miscellaneous Income) has been redesigned, and Form 1099-NEC for reporting nonemployee compensation has been reintroduced in tax year 2020. Prior to the change, non-employee compensation on Form 1099-MISC, box 7, needed to be filed with the IRS by Jan. 31, and all other payments on Form 1099-MISC needed to be filed with the IRS by Feb. 28 for paper filers (March 31 for electronic filers).
Beginning in tax year 2020, Form 1099-NEC (Nonemployee Compensation) must be filed with the IRS by Feb. 1, and Form 1099-MISC must be filed with the IRS by March 1 if filing on paper (March 31 if filing electronically). Both Forms 1099-MISC & 1099-NEC must be furnished to the recipient by Feb. 1. Payments of more than $600 in nonemployee compensation, including independent contractors, attorneys, and golden parachute payments, will be reported on Form 1099-NEC, box 1.
NOL CARRYBACK AND CARRYOVER LOSSES
Under the CARES Act, NOLs arising in tax years beginning after December 31, 2017, and before January 1, 2021 (e.g., NOLs incurred in 2018, 2019, or 2020 by a calendar-year taxpayer) may be carried back to each of the FIVE TAX YEARS preceding the tax year of such loss
Charitable contributions
The CARES Act makes the following changes to charitable contributions beginning in tax year 2020:
Kiddie tax changes
Prior to the Tax Cuts and Jobs Act (TCJA), the net unearned income of a child under 19 years old (or a full-time student under 24) was taxed at the parent’s tax rates, if the parent’s rates were higher than the child’s rates. For tax years beginning after 2017, the TCJA changed the rule so that the unearned income of the child would be taxed at trust and estate tax rates.
However, this change seemed to unfairly increase the tax on certain children. Effective for tax years beginning after Dec. 31, 2019, the SECURE Act repeals TCJA rules, and you may elect to apply the pre-TCJA rules in 2018 and 2019. Also, a child’s earned income is taxed at single rates and this has not changed.
Required minimum distribution age raised from 70½ to 72
Prior to 2020, participants in employer-sponsored retirement plans (for example, 401(k) plans), traditional IRAs, and individual retirement annuities needed to begin taking required minimum distributions (RMDs) from their plans by April 1 of the year following the year they turned 70½ years old.
Under the SECURE Act and for distributions required to be made after Dec. 31, 2019, the age at which individuals must start taking distributions from these retirement plans has been increased from 70½ to 72. The RMD rules try to get taxpayers to spend retirement savings during their lifetimes instead of transferring wealth to beneficiaries.
Please note: Under the CARES Act, RMDs are not required for 2020. Initially, the provision stated that you may return an RMD within 60 days if you had already taken the distribution. Notice 2020-51 allows you to return the distribution by Aug. 31, 2020.
General Notes about some more provisions:
Deadline for filing and paying your taxes
There is one key piece of information that every taxpayer — especially those who will be filing at the last minute — should keep in mind as April 15, 2021 draws near:
The deadline for filing 2020 returns is midnight on April 15, 2021.
It also applies to the deadline for requesting an individual return tax-filing extension and for making 2020 IRA contributions.
Homebuyer credit restriction and repayment
If you claimed the first-time homebuyer credit for a home bought in 2008 you must generally make the 12th of 15 annual repayment installments on your 2020 return. Separately, a repayment requirement also applies where you purchased a home and claimed the credit on a prior year return and then sold it or stopped using it as a main home in 2020.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act,
Standard Deductions
Many of the standard deduction amounts were increased for 2020. Married couples get $24,800 ($24,400 for 2019), plus $1,300 for each spouse age 65 or older. Singles can claim a $12,400 standard deduction ($12,200 for 2019)—$14,050 if they're at least 65 ($13,850 for 2019). Head-of-household filers get $18,650 for their standard deduction ($18,350 for 2019), plus an additional $1,650 once they reach age 65. Blind people can tack on an extra $1,300 to their standard deduction ($1,650 if they're unmarried and not a surviving spouse).
Expired or Expiring Tax breaks were revived
For a decade, homeowners who had to pay private mortgage insurance on loans originated in 2007 or later were allowed to deduct the cost if they itemized deductions on Schedule A of their tax returns. (PMI is usually charged if you put less than 20% down when you buy a home.) But, that write-off expired at the end of 2017...until it was brought back to life retroactively in December 2019. So if you paid PMI in 2019, go ahead and deduct the cost. However, this deduction phases out if your adjusted gross income exceeds $100,000 and disappears if your AGI exceeds $109,000 ($50,000 and $54,500 if you're married filing a separate return).
The Families First Coronavirus Response Act requires private employers with fewer than 500 workers and all public employers to provide paid sick leave to employees affected by the coronavirus (exceptions for health care providers, emergency responders and certain small businesses are allowed). Full-time workers get up to 80 hours of sick leave, while part-time workers get sick leave for the average number of hours they work over a two-week period. A worker is only able to take paid leave if he or she is:
- Subject to a federal, state or local coronavirus quarantine or isolation order;
- Advised by a health care provider to self-quarantine due to coronavirus concerns;
- Experiencing coronavirus symptoms and seeking a medical diagnosis;
- Caring for someone else who is subject to a coronavirus-related federal, state or local quarantine or isolation order, or who has been advised by a health care provider to self-quarantine due to coronavirus-related concerns;
- Caring for a son or daughter if the child's school or daycare has been closed, or the child's care provider is unavailable, due to coronavirus precautions; or
- Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.
Workers who are sick or quarantined get full pay while on coronavirus leave, up to $511 per day ($5,110 in total). Workers caring for another person or on leave because of an HHS-specified condition get two-thirds of their normal pay while on leave, up to $200 per day ($2,000 in total).
The new law also extends the existing Family and Medical Leave Act (FMLA) to cover a worker's absence (including an inability to telework) to care for a minor son or daughter if the child's school or daycare has been closed, or the child's care provider is unavailable, because of the coronavirus.
Workers receive two-thirds of their regular salary while on coronavirus-related FMLA leave, but compensation is capped at $200 per day and $10,000 in total. However, this leave does not kick in until after 10 days. (During that time, workers are presumably able to take sick leave as described above.)