How did the Corona Virus Relief Bill effect 2020 tax year?

What You Need To Know About your 2020 Taxes

Taxes have always been a headache. We look forward to the return, but gathering all the necessary documents, finding a trusted tax preparer, and figuring out what and how to file can be stressful. Not to mention 2020 was a year of financial change for many Americans.  

It’s easy to hop on sites like Turbo Tax, input your information, and be done with it. However, over $1 trillion in tax deductions are claimed every year. With that in mind, it might be a good idea to get familiar with how taxes work. 

Before President Joe Biden was elected to his current presidency, he proudly laid out his previsionary tax plan. Increased taxes for America’s wealthy and large corporations, and tax credits for those not meeting certain tax brackets. Though an official tax bill has yet to be passed, amendments have been made for 2020 filing.  

The third round of stimulus checks is on the way, and tax season is in full swing. Read below for the new changes introduced under the CARES Act and the American Rescue Plan Act to find out how they affect you. 

Changes to the Standard Deduction

Itemized versus standard deductions are the first thing to consider. Nearly 90% of tax filers qualify for the standard deduction. If you’re unfamiliar with this term, the standard deduction reduces your taxable income, meaning you pay fewer taxes on your earned income. 

The change to the standard deduction is the most notable amendment as it affects most tax filers. For single filers, the amount was raised to $12,400 for individuals which from previously $12,200. For married joint filers the deduction amount was raised from $24,800 from $24,400. For the head of household, that number was increased to $18,650 from $18,350. Knowing the standard deduction, it is important to note that it is only necessary to itemize your tax returns if that amount is greater than the standard deduction. Otherwise, it may not be worth the trouble. 

Earned Income Tax and “Look Back” Credits

2020 was certainly no walk in the park. Many tax filers saw a decrease in income which means they may qualify for lower thresholds on certain credits. While this isn’t an automatic credit, filers can “look back” at their 2019 earned income and claim credits based on their 2019 income if it was higher than their 2020 income. This rule applies to Earned Income Credits (EIC) and Additional Child Tax Credits (ACTC). The key takeaway for looking back is that a trusted tax preparer that can determine which route is best for your financial situation. 

Child Tax Credits 

This amendment will probably only last a year. Families with children, particularly lower earners are eligible for a larger tax credit. Detailed in the American Rescue Plan, the most notable changes here are the increased age of eligible children (now 17 years), and the credit is now fully refundable, meaning families get to pocket more of the money than previously due to income thresholds 

Another temporary caveat is that instead of a lump sum, the only is set to be released in payments later this year. This initiative has the biggest impact on America's lowest-earning families. 

Income limits do apply. The full tax break would be available to individuals who earn up to $75,000 a year; heads of household who earn up to $125,000; and married couples filing a joint tax return who earn up to $150,000. (CNBC)

Unemployment Income

If you didn’t opt to have taxes taken out of your weekly unemployment, you might be worried that you have a hefty tax bill on the way. The good news is, if you had less than $150,000 in gross income in 2020, then the first $10,200 is non-taxable. This amount doubles for couples at $20,400. 

Retirement 

Economic hardship is the fuel behind many of these new tax provisions, meaning they may or may not be amended in the coming years. However, the CARES Act did away with the 10% early withdrawal penalty on up to $100,000 for individuals who withdraw the money to deal with economic hardships caused by the pandemic. 

Tax payment options on these withdrawals are also more relaxed allowing up to 3 years to pay back the taxes. Seniors are also now able to continue making contributions to their 401K up to age 72 when previously they were forced to begin withdrawing funds by age 71%.  

Stimulus Checks & Taxes 

The government has released three series of Economic Impact Payments (EIPs) through the CARES Act. Commonly known as a stimulus check, these payments were issued in hopes of boosting the economy and keeping Americans out of debt. However, many people did not receive any payments or did only received one stimulus package. These individuals can claim the difference when they file taxes under a Recovery Rebate Credit. Merry Christmas. You just became eligible for a fat tax check. The Recovery Rebate also qualifies for stimulus not received for dependents and children.

Side note: Stimulus checks are not taxable. That money was a tax credit paid in advance. 

Charitable Deductions

This deduction applies strictly for the tax year 2020. Previously, filers could only write-off charitable donations if they file an itemized return. However, considering the pandemic and other natural disasters that occurred in 2020, the CARES Act rewarded filers who take the standard deduction (non-itemized) by allowing them to claim up to $300 in donations. 

This deduction only applies to monetary donations. 

MISC

Other odds, ends, and minor changes to tax filing took know:

Health Savings Account (HSA) contribution rose, but only just. The max contribution for singles was raised from $3,500 to $3,550, and for families, it went from $7,000 to $7,100. 

Qualified medical expenses that are above 7.5% of annual gross income can be deducted for 2020. 

Credits for nonbusiness, energy property improvements made to your home (such as installing energy-saving roofs, windows, skylights, doors, etc.) were extended through 2021. 3 out of 5 homeowners did some type of home improvement project while being at home in 2020.

Tax forms are also now available in Spanish making it easier for Latinx filers.

Most of these amendments are short-term. Many will go away as the economy begins to stabilize. However, with a new president introducing a new tax plan, more change is bound to come. Read about it here.

To learn more about the various deductions and which ones apply to you or to prepare for the 2021 tax year, visit Madison Accounting and Tax Services and schedule a virtual appointment.