Tax Law Changes for 2020

 

Individual Provisions

Tax Brackets and Tax Rates:

 

 

 

 

 

Standard Deduction:

If legally blind or age 65 and over:

            Unmarried taxpayers                          $1,650 each

            Married taxpayers                                          $1,300 each

If a dependent on someone else’s return:

            No earned income                                          $1,100

            With Earned Income                           $350 plus earned income up to

                                                                                    standard deduction for single

No personal exemptions again this year.

 

Kiddie Tax

The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24.  Unearned income is income from sources other than wages and salary, like dividends, interest and unemployment.  Your child must pay taxes on their unearned income if that amount is more than $1,100 in 2020.  Taxable income attributable to the net unearned income will be taxed according to the brackets applicable to the parent(s).

 

Capital Gains

Stays the same at 0%, 15% and 20%  (see chart below)

 

Medical Expenses

The floor for medical expenses on the federal return stays at 7.5%, for New York State the floor is 10%

State and Local Taxes (SALT)

The cap of $5,000 for married filing separate and $10,000 for any other filing status remains in effect.

Charitable Donations

If you are itemizing, the cap on charity is 60% of your AGI.  However, for one year you may make an election to use 100% cap of taxpayers Adjusted Gross Income to calculate charitable donations.

Without itemizing a taxpayer is allowed a $300 adjustment to income per return.  For 2021 this is expanded to $600 for Married Filing Joint filers.

Earned Income Credit

For 2020, the maximum EITC available for married filing joint is increased to $6,660 with three or more children.  For married couples with no children the max credit is increased to $538.

New For 2020, the taxpayer may elect to use their 2019 income to determine an individual’s credit eligibility for the 2020 tax year.  This was passed in the second round stimulus bill.

Child Tax Credit New For 2020, the taxpayer may elect to use their 2019 income to determine an individual’s credit eligibility for the 2020 tax year.  This was passed in the second round stimulus bill.

Adoption Credit

For 2020, the maximum credit for adoptions is $14,300  on out of pocket costs.  Remember for a special needs child the taxpayer will receive the maximum credit of $14,300 with no money out of pocket.  Phase out for this credit starts at a MAGI of $214,520 and completely phased out at $254,520.

Lifetime Learning Credit

For 2020, the phase out starts at $118,000 for joint filers and $59,000 for single filers.

Foreign Earned Income Exclusion

For 2020, the foreign earned income exclusion is $107,600.

Flexible Savings Accounts

Flexible Savings Accounts (FSA)balances can be rolled from the 2020 tax year into the 2021, and 2021 balances can be rolled into 2022.  This will help taxpayers with unused balances such as for childcare expenses.

IRA and Pension Contribution Limits

 

IRA  Required Minimum Distributions

For 2020, the minimum distribution requirement was waived.   For individuals who turned 70 ½ after December 31, 2020 the required minimum distribution begins at age 72.

Non spousal beneficial IRA’s with an age difference of more than 10 years younger than the decedent are required to distribute all monies by year 10 after inheritance.  For beneficiaries who have an age difference of less than 10 years younger than the decedent the old law still applies where you have three options, (1) take the entire amount at once, (2) spread the distributions over five years and (3) annuitize the beneficial IRA over your lifetime.

Retirement Plan Distributions

Under the Cares Act and for distributions from IRAs and workplace retirement plans, if the taxpayer is impacted by COVID-19, they can take a distribution up to $100,000 and not be subjected to the 10% early withdrawal penalty.  The distribution can be included in income ratably over a 3-year period unless the taxpayer elects otherwise.  The taxpayer can also contribute the money back to their retirement plan within three years and treat the transaction as a direct rollover.

IRA Contribution Age Limit

Under the SECURE Act and for contributions made for tax years beginning 2020, individuals of any age can make contributions to a traditional IRA, assuming there is enough earned income.

Retirement Distributions for births and adoptions

Under the SECURE Act, 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

Extenders that will expire at the end of 2020

·        Exclusion from gross income for discharge of debt income from qualified principal residence debt

·        Deduction for mortgage insurance premiums

·        Tuition and fees deduction for higher education

·        Nonbusiness energy property credit (still with $500 lifetime limit)

·        Medical expense deduction subject to 7.5% of adjusted gross income

Economic Stimulus Reconciliation

Every taxpayer must complete worksheet 8, Recovery Rebate Credit Worksheet.  This worksheet as the title states reconciles the stimulus payment issued to the taxpayer.  If the taxpayer did not receive the full or any stimulus they may be entitled to the difference when filing their 2020 personal return based upon their adjusted gross income. 

SINGLE OR MARRIED BUT FILING SEPARATELY

HEAD OF A HOUSEHOLD

MARRIED FILING JOINTLY

You are eligible to receive the full payment if your adjusted gross income is below $75,000 and a reduced payment amount if it is more than $75,000 The adjusted gross income limit for a reduced payment is $99,000 if you don’t have children and increases by $10,000 for each qualifying child under 17.

You are eligible to receive the full payment if your adjusted gross income is below $112,500 and a reduced payment amount if it is more than $112,500. The adjusted gross income limit for a reduced payment is $136,500 if you don’t have children and increases by $10,000 for each qualifying child under 17.

You are eligible to receive the full payment if your adjusted gross income is below $150,00 and a reduced payment amount if it is above $150,000. The adjusted gross income limit for a reduced payment is $198,000 if you don’t have children and increases by $10,000 for each qualifying child under 17.

If your adjusted gross income is below $75,000, you’ll receive the full $1,200. You will also receive $500 for each child under the age of 17 you claim on your taxes.

If your adjusted gross income is above $75,000, you’ll receive an amount that will be reduced by $5 for every $100 in adjusted gross income above $75,000.

If your adjusted gross income is more than $99,000 and you don’t claim any children under the age of 17, you won’t receive an Economic Impact Payment. This limit will increase to $109,000 if you have one child, $119,00 if you have two children, and an additional $10,000 for each child after that.

If your adjusted gross income is below $112,500, you’ll receive the full $1,200. You will also receive $500 for each child under the age of 17 you claim on your taxes.

If your adjusted gross income is above $112,500, you’ll receive an amount that will be reduced by $5 for every $100 in adjusted gross income above $112,500.

If your adjusted gross income is more than $136,500 and you don’t claim any children under the age of 17, you won’t receive an Economic Impact Payment. This limit will increase to $146,500 if you have one child, $156,500 if you have two children, and an additional $10,000 for each child after that.

If your adjusted gross income is less than $150,000, you’ll receive the full $2,400. You will also receive $500 for each child under the age of 17 you claim on your taxes.

If your adjusted gross income is above $150,000, you’ll receive an amount that will be reduced $5 for every $100 in adjusted gross income above $150,000.

If your adjusted gross income is more than $198,000 and you don’t claim any children under the age of 17, you won’t receive an Economic Impact Payment. This limit will increase to $208,000 if you have one child, $218,000 if you have two children, and an additional $10,000 for each child after that.

 

Business Provisions

 Employee Retention Credit

Employers are provided a refundable payroll tax credit for 50% of wages paid to employees during the COVID-19 crisis. The credit is available to employers whose:

• Operations were fully or partially suspended due to a COVID-19-related shutdown order, or

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

The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through Dec. 31, 2020.

Extension of the Employee Retention Credit

With the Stimulus Bill #2, this credit was extended through July 1st, 2021 but also modified to the maximum credit to $14,000 by changing the calculation from 50% of wages paid up to $10,000 to 70% of wages paid up to $10,000 for any quarter.  This bill also clarifies that if the employer received a PPP loan they are also eligible to take this credit.

Delay of Payment of Employer Payroll Taxes

Employers and self-employed individuals can defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2% Social Security tax on employee wages.

The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by Dec. 31, 2021 and the other half by Dec. 31, 2022. The Social Security Trust Funds will be held harmless under this provision.

Modifications for New Operating Losses (NOLs)

Temporary changes to the NOL carryback rules allow business to carryback certain losses. Under the TCJA, NOLs are subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The relaxed rules provide that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the 80% taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns.

Payroll Protection Program (PPP)

This is a program set up during COVID-19 to offer a loan to businesses to keep their staff on payroll.   The loan is officially offered through the Small Business Administration processed by their banking institution (ex. KeyBank, M&T).  The money received is/was to be used to pay for payroll, rent and utilities.  The taxpayer may apply for loan forgiveness through their lending institution.  With the Second Stimulus Package the expenses paid with the PPP loan are NOW deductible.