TAX CHANGE SUMMARY: We are pleased to provide you an outline of important tax law changes that may affect the filing of your 2020 tax return.
Due to the coronavirus pandemic and the enactment of legislation to offset economic burdens, there is a lot to consider in planning for the preparation of your 2020 tax return.
- The SECURE Act was signed into law in December of 2019. This legislation extended several expiring deductions and tax credits and provided changes to retirement-related rules.
- The Families First Coronavirus Response Act (Families First Act), the first piece of COVID-19 tax-related legislation, was signed into law in early March, 2020. It provides tax credits for employers and self-employed individuals.
- The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the biggest piece of legislation for the year, was enacted in late March.
- Finally, in December, the Consolidated Appropriations Act, 2021 (CA2021) provided additional economic stimulus as well as other tax relief (as of 12/23 it has not yet been signed into law).
The following are some of the tax code changes which may affect you:
Economic Impact Payment (EIP). Under the CARES Act individuals with income under a certain level received a payment of $1,200 per individual plus $500 per child (under age 17 as of 12/31/2019). The CA2021 Act provides an additional $600 per individual or child. Taxpayers who didn’t get some or all of the EIP to which they were entitled (for example, not all dependents were listed on the 2018 tax return) will be able to claim the difference as a Recovery Rebate Credit on your 2020 tax return. It is very important that you document payments received from the IRS using a bank statement and/or a copy of the letter sent by the IRS last August. It is anticipated that the December stimulus payment will be considered to be received in 2020 even if received in 2021.
Forms 1099-MISC and 1099-NEC: A new form,Form 1099-NEC,has been introduced for reporting nonemployee compensation in tax year 2020 in place of Box 7 on the 1099-MISC.
Charitable Contributions: The CARES ACT and the CA2021 Act added an above-the-line charitable contribution deduction for taxpayers who don’t itemize deductions: $600 if Married Filing Jointly; $300 if Single, Head of Household or Qualifying Widower.
Required minimum distribution age raised from 70½ to 72: Per the SECURE Act, for distributions required to be made after Dec. 31, 2019, the age at which individuals must start taking distributions from these retirement plans has been increased from 70½ to 72. Under the CARES Act, all taxpayers are NOT required to take an RMD in 2020.
Retirement plan distributions: Under the CARES Act, if you are impacted by COVID-19 and under 59 ½, you can take a distribution up to $100,000 from your IRAs or workplace retirement plans and not be subjected to the 10% early withdrawal penalty. The distribution can be included in income on your 2020 return or spread over a 3-year period. You can also contribute the money back to the retirement plan within three years and treat the transaction as a direct rollover.
Repeal of maximum age for traditional IRA contributions: Under the SECURE Act and for contributions made for tax years beginning after 2019, individuals of ANY AGE can make contributions to a traditional IRA, assuming there is enough compensation.
Penalty-free retirement plan withdrawals 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 distribution for expenses related to the birth or adoption of a child.
Credit for Sick/Family Leave for Self-Employed Individuals: Under the Families First Act, if you are considered an eligible self-employed individual, you may be eligible for a tax credit of up to $500 if you were unable to work: 1) due to having COVID-19 yourself; 2) because you cared for a family member with COVID-19; or 3) because you provided child care due to school closure or lack of day care.
Extender provisions (expired after 2017, retroactively extended through 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; and
- Medical expense deduction subject to 7.5% adjusted gross income threshold.
Payroll Protection Plan: If you are self-employed or own a business (Sch. C, S-Corp or Partnership), you are eligible for a forgivable small business loan. Under the CARES ACT, PPP1 covered up to eight weeks of payroll and other business expenses. With the CA2021 Act, PPP2 borrowers may receive a forgivable loan covering payroll and other expenses of up to 2.5 times the average monthly payroll as long as you can show a 25% reduction or more in gross revenue in any one quarter of 2020 compared to 2019.
Please call me at your convenience so we can set up a virtual appointment to discuss your 2020 tax return preparation.