Is it really time to start thinking about filing your 2020 taxes? 2020 is a particularly important year to start planning.
In 2020, we have to consider inflation. The Coronavirus Aid Relief and Economic Security (CARES) Act provides individual taxpayers several new tax breaks, most of which will only be available for the 2020 tax year. The sooner you know about the changes, the better your planning.
Here are 6 ways your return may differ this year:
- Waived RMDs. If you’re 72 or older, you are generally required to take a required minimum distribution (RMD) from your IRA, 401(k) or other tax deferred retirement account. Not so for 2020. But it’s only waived for this year. The waiver also applies if you reached 70.5 in 2019 but waited to take your first RMD in 2020 as allowed under the SECURE Act. Most likely, your RMD will count as taxable income, so exercising this waiver may mean that you lower your taxable income and can save on taxes for 2020.
Consult your tax professional before you make this decision because there are a number of factors to consider such as the state of the market and your living expenses.
- Higher Standard Deduction. The tax changes under President Trump nearly doubled the standard deduction and the amount increased more for 2020. The 2020 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 Retirement Contributions. Depending on the type of retirement account you are invested in, the maximum amount you can contribute may have increased this year. 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 Deductions. The CARES act included a provision allowing you to take a $300 “above the line” charitable deduction even if you take the standard deduction and don’t itemize your taxes. This was enacted to encourage people to donate money 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.
- Rules for Early Withdrawal from Retirement Accounts. If your finances were seriously impacted by the coronavirus, you may be in need of funds to pay your expenses. Provision of the CARES Act allow for more flexibility for an emergency withdrawal from a tax deferred account without incurring the normal penalties. 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.
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
- Having 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 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.
Plan Now. With all of these changes, it is not too early to start planning for your 2020 taxes and take advantage of these one-time tax breaks. Truest Law would love to help you plan for the future. We don’t just draft documents, we help you make informed and empowered decisions for you and your family. Connect with us at Truestlaw.com or 480-949-6500. We would love to schedule a session to help you get started.