Taxes. You hate them. I hate them. But taxes are a way of life, so you need to know about the changes when you file your 2020 Federal Income Tax Return (Form 1040.) The coronavirus (COVID-19) pandemic is behind the most significant changes.
No Required Minimum Distributions (RMDs)
Once you reach age 72, the IRS says you must start withdrawing money annually from tax-advantaged retirement accounts, including traditional IRAs and 401(k)s. These required minimum distributions count as fully taxable income.
The withdrawals help ensure that people don’t use retirement accounts to avoid taxes.
The CARES Act suspended the required withdrawals for 2020 to help retirement savers recover from the sharp stock market downturns seen during the spring, when the virus started hammering the U.S. economy.
Charitable deductions have been simplified
The CARES Act has provided an incentive to help those in need. The law makes it easier for you to get a tax break for charitable donations made during 2020.
Under normal conditions, you can deduct charitable gifts only if you itemize deductions. But for the 2020 tax year, the IRS will allow you to write off up to $300 in cash contributions to charity, even if you take the standard deduction.
However, your donation must be given to a qualified charitable organization.
Standard deductions have been increased
When you file your Federal Income Tax (Form 1040), you can either take the standard deduction to reduce your tax bill or itemize your deductions if they’ll add up to more tax savings than the standard deduction.
The vast majority of taxpayers in the U.S. use the standard deduction.
For the 2020 tax year, these are the standard deduction amounts:
- Single: $12,400, increased by $200.
- Married filing jointly: $24,800, increased by $400.
- Married filing separately: $12,400, increased by $200.
- Head of household: $18,650, increased by $300.
Raised the income brackets
The good news is that the tax rates haven’t gone up for the 2020 tax year.
Income tax brackets typically rise every year due to inflation. The tax brackets have increased slightly, so you might pay more taxes next year even if your income didn’t increase.
Do you think you might save more money by itemizing? If you answer yes, it doesn’t have to be a major hassle if you use free or low-cost tax software available from a number of reputable companies on the Internet.
Health savings account limits have increased
Due to the coronavirus pandemic, your health has obviously become an important issue. With a health savings account, you can avoid income taxes on your contributions today and on the money you withdraw for your medical needs in the future.
You can contribute to a tax-free Health Savings Account (HSA) as long as your health insurance plan in 2020 was considered a high-deductible plan.
- For 2020, the IRS defines a high deductible health as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and coinsurance) can’t be more than $6,900 for an individual or $13,800 for a family. (This limit doesn’t apply to out-of-network services.)
But there are rules on how much money you can save in your HSA every year. For 2020, those limits have gone up by $50, to $3,550, for self-only coverage; and by $100, to $7,100, for family coverage.
Higher income limits for the Saver’s Credit
The saver’s credit helps low and medium income taxpayers save for retirement by providing a tax credit when you contribute to retirement accounts such as 401(k)s and IRAs.
Unfortunately, many Americans don’t know about it.
As in years past, the IRS increased the income limit for 2020, making the tax credit available to more people. The new limits are:
- Married filing jointly: $65,000, increased by $1,000.
- Head of household: $48,750, increased by $750.
- All other tax-filing statuses: $32,500, increased by $500.
No tax if your employer helped with your student debt
The CARES Act allowed employers to voluntarily pay up to $5,250 of a worker’s college loan during 2020. Both employers and employees could avoid federal payroll taxes on the money, and the employees won’t have to pay federal income tax on the amount when they file their taxes next year.