As the 2021 filing season rapidly approaches, here is a reminder of the federal tax law changes and updates that will affect individual 2020 income tax returns. For the tax year 2020, the tax rates are the same but there are some changes to the income brackets to account for inflation.
2020 Marginal Income Tax Rates and Brackets
| 2020 Marginal Tax Rates | Single Tax Bracket | Married Filing Jointly Tax Bracket | Head of Household Tax Bracket | Married Filing Separately Tax Bracket |
| 10% | $0 – 9,875 | $0 – 19,750 | $0 – 14,100 | $0 – 9,875 |
| 12% | $9,875 – 40,125 | $19,750 – 80,250 | $14,100 – 53,700 | $9,875 – 40,125 |
| 22% | $40,125 – 85,525 | $80,250 – 171,050 | $53,700 – 85,500 | $40,125 – 85,525 |
| 24% | $85,525 – 163,300 | $171,050 – 326,600 | $85,500 – 163,300 | $85,525 – 163,300 |
| 32% | $163,300 – 207,350 | $326,600 – 414,700 | $163,300 – 207,350 | $163,300 – 207,350 |
| 35% | $207,350 – 518,400 | $414,700 – 622,050 | $207,351 – 518,400 | $207,351 – 311,025 |
| 37% | Over $518,400 | Over $622,050 | Over $518,400 | Over $311,025 |
Standard Deductions in 2020
The standard deduction for 2020 went up to adjust for inflation.
| Filing Status | 2019 | 2020 |
| Single | $12,200 | $12,400 |
| Married Filing Jointly and Qualifying Widow(er) | $24,400 | $24,800 |
| Married Filing Separately | $12,200 | $12,400 |
| Head of Household | $18,350 | $18,650 |
Health Savings Accounts
The Health Savings Accounts limits for 2020 increased to adjust for inflation.
| Inflation-Adjusted Limitations for HSAs | 2019
| 2020 | ||
| Family | Self Only | Family | Self Only | |
| Contribution Limit | $7,000 | $3,500 | $7,100 | $3,550 |
| The additional catch-up contribution for taxpayer age 55 or older | $1,000 per qualifying spouse | $1,000 | $1,000 per qualifying spouse | $1,000 |
| Minimum health insurance deductible | $2,700 | $1,350 | $2,800 | $1,400 |
| Maximum out of pocket | $13,500 | $6,750 | $13,800 | $6,900 |
Cryptocurrency
In 2019, the IRS issued a revenue ruling (RR 2019-24) on the treatment of crypto. Despite the revenue ruling, many questions remain unanswered about how crypto income and reporting are treated — especially if it involves overseas and international cryptocurrency. Moreover, the draft version of the 2020 1040 tax return has a direct question regarding virtual currency (aka crypto or Bitcoin) on the very first page of the tax return. That is a clear indication of how cryptocurrency has become a key enforcement priority for the US government.
Recovery Rebate Credit
This is a refundable credit for those who did not receive the full Economic Impact Payment in 2020, which is as an advance against a 2020 federal tax credit. Taxpayers must reconcile the amount of the advanced credit received with the amount the taxpayer is due based on the taxpayer’s 2020 income. Although the Economic stimulus payment was limited based on their 2018 or 2019 income, taxpayers will not be required to repay any credit, even if their 2020 income was higher than 2018 or 2019.
Charitable Contributions
The CARES Act makes the following changes to charitable contributions beginning in the tax year 2020 as follows:
- A $300 above-the-line charitable contribution deduction is now available for taxpayers who take Standard Deduction.
- The 60% adjusted gross income (AGI) limit on cash contributions by individuals is disregarded.
- For corporations, the taxable income limit is increased from 10% to 25% on cash charitable contributions.
- The taxable income limit on contributions of food inventory increased from 15% to 25%.
Noncash property and contributions carried forward from prior years do not qualify for this deduction, the existing 20%, 30%, and 50% limits apply.
Kiddie Tax Changes
For tax years beginning after 2017, the Tax Cuts and Jobs Act (TCJA) changed the rule so that the child’s unearned income would be taxed at the trust and estate tax rates.
For 2020 and beyond, the Secure Act repeals the TJCA kiddie tax rules to pre-TCJA rules wherein a child’s unearned income is taxed at the parent’s or parents’ marginal tax rate. Also, a child’s earned income is taxed at single rates and this has not changed.
Educational Expenses
The SECURE Act added to the list of qualified higher education expenses that are permitted by IRC §529 account distributions to include the following:
- Costs of certain apprenticeship programs, including fees, books, and supplies.
- Student loan repayments up to a total of $10,000.
Unemployment Compensation
The COVID-19 pandemic resulted in millions of unemployment claims. For 2020, taxpayers will receive a Form 1099-G and all unemployment insurance benefits received are taxable as ordinary income and must be reported on the recipient’s federal income tax return. However, they are not subject to Social Security and Medicare taxes.
Retirement Plans:
- Under the CARES Act, taxpayers under age 59 ½ were allowed to take up to $100,000 out of their 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty if the taxpayer is impacted by COVID-19. 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.
- Under the SECURE Act and for distributions required to be made after December 31, 2019, the age at which individuals must start taking distributions from these retirement plans has been increased from 70 ½ to 72. 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 August 31, 2020.
- The SECURE Act allows owners of traditional IRAs to keep putting money in their accounts beyond age 70 ½ starting in 2020.
- 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.
Qualified Business Income Deduction
The code provides a deduction of up to 20% of QBI from a US trade or business operated as a sole proprietorship or through a partnership, S Corporation, trust, or estate. Taxpayers whose taxable income is above a phaseout threshold may have their QBI deduction limited or completely phased out. The QBI phased out deduction depends on many factors, including whether a taxpayer’s qualified business income is deemed to be from a specified service trade or business (SSTB) and/or the amount of W-2 wages and the unadjusted basis of assets immediately before acquisition (UBIA).
In the 2020 draft instructions the IRS released to Form 8995 for Qualified Business Income Deduction Simplified Computation, it appears to remove charitable contributions from the list of items the IRS believes should reduce a taxpayer’s QBI. However, the IRS has not published anything that definitively states it no longer considers charitable contributions as deductions in computing QBI.
For taxable years beginning in 2020, the threshold amount under §199A(e)(2) is $326,600 for married filing joint returns, $163,300 for married filing separate returns, and $163,300 for all other returns.
Self-Employed Individuals
- Credits for Sick and Family Leave – This new credit is for self-employed individuals who were affected by the coronavirus. It allows them to claim a credit similar to sick leave if they were unable to work because they had coronavirus or had to care for someone else who had coronavirus or a credit similar to family leave if they were unable to work because they had to care for their child who had coronavirus. The period covered is April 1 – December 31, 2020, and the credit is claimed on new Form 7202 with their 2020 Individual Income Tax Return.
- Payroll Tax (Social Security Portion) Deferral – This tax provision permits self-employed individuals to delay paying 50% of the Social Security tax imposed for the period beginning March 27 and ending December 31, 2020.
Deferred tax is payable in the following two years with half paid in 2021 and half paid in 2022. Taxpayers can make an election to defer this tax on Schedule SE, Part III. The actual amount of tax that can be deferred may be limited by the amount of tax that the self-employed individual paid in estimated taxes or had withheld during 2020.
Extender Provisions
On December 27, 2020, as part of the Stimulus bill, President Trump signed into law the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which extended or made permanent several temporary tax code provisions. Below are a few of the key higher impact-extender items for individuals:
- Reduction in medical expense deduction from 10% to 7.5% was made permanent.
- Deduction for mortgage insurance premiums was extended through 2021.
- Repealed the tuition and fees deduction and increased the income limitation of the lifetime learning credit was made permanent.
- Energy-efficient homes credit was extended through 2021.
- Exclusion from gross income for discharge of debt income from qualified principal residence debt was extended through 2025.
Author, Elizabeth Shauger, CPA
Tax Manager
Spiegel Accountancy
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.