6 Changes to Watch for In Your 2020 Taxes

Although you may have just filed your 2019 income taxes in July, now is the time to start thinking about your 2020 return due next April. While it’s always a good idea to be proactive regarding tax planning, it’s particularly important this year.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides individual taxpayers with several new tax breaks, most of which will only be available this year. The sooner you learn about the different forms of tax-savings available, the more time you will have to take advantage of them.

Here are 6 ways your 2020 return will differ from prior years:

1. Waived RMDs:

You are typically required to take an annual required minimum distribution (RMD) from your IRA, 401(k), or other tax-deferred retirement account starting in the year when you turn 72, but the CARES Act temporarily waived the RMD requirement for 2020. The waiver also applies if you reached age 70½ in 2019, but waited to take your first RMD until 2020, as allowed under the SECURE Act.

RMDs generally count as taxable income, so taking this waiver means that you may have lower taxable income in 2020, thereby reducing your income tax liability for 2020.

However, you should consider several factors, including the state of the market and your living expenses, when deciding whether to waive your RMDs. Given this, we recommend consulting with your financial advisor, tax professional, and us before making your final decision.

2. Higher standard deduction:

If you do not itemize deductions, you can use the standard deduction to reduce your taxable income. Trump’s tax reform legislation nearly doubled the standard deduction starting in 2018. It has increased even more for inflation since then. For 2020, the new standard deduction amounts include the following:

• • $12,400 for single filers;
  • $24,800 for those who are married filing jointly; and
  • $18,650 for people filing as a head of household.

3. Higher contribution limits for certain retirement accounts:

Depending on the type of retirement account, the maximum amount you can contribute may have increased this year. The contribution limit for a 401(k) or similar workplace-retirement plan has increased from $19,000 in 2019 to $19,500 in 2020. If you are 50 or older in 2020, the 401(k) catch-up contribution limit is $6,500, up from $6,000.

On the other hand, the amount you can contribute to a traditional IRA remains the same for 2020: $6,000, with a $1,000 catch-up limit if you’re 50 or older. And the maximum income limits for contributing to a Roth IRA have increased for 2020.

In 2020, eligibility to contribute to a Roth IRA starts to phase out at $124,000 for single filers and $196,000 for married couples filing jointly. Those phase-out limits are up from 2019, which started at $122,000 for single individuals and $193,000 for married couples.

4. New charitable deduction:

In most years, you can only deduct charitable donations on your income tax return when you itemize deductions. However, the CARES Act included a provision to allow everyone to claim up to a $300 “above-the-line” deduction for charitable contributions if you take the standard deduction in 2020. This change was designed to encourage people to donate money to charity to help with COVID-19 relief efforts.

5. Adoption credit changes:

If you adopted a child this year, you can claim a higher tax credit on your 2020 return to cover your adoption-related expenses such as adoption fees, court and attorney costs, and travel expenses. The maximum credit amount for 2020 is $14,300, which increases $220 from last year.

6. New rules for early withdrawals from retirement accounts:

If the coronavirus response seriously impacted your finances, you might be in dire need of funds to cover your expenses. Thanks to new rules under the CARES Act, you now have more flexibility to make an emergency withdrawal from tax-deferred retirement accounts in 2020, without incurring the normal penalties.

Ordinarily, permanent withdrawals from traditional IRAs or 401(k) accounts are taxed at ordinary income rates in the year the funds were taken out. And pulling out money before age 59 1/2 would also typically cost you a 10% penalty.

But thanks to the CARES Act, you can avoid the 10% penalty on up to $100,000 in coronavirus-related distributions (CRDs) from your retirement account. Also, you can spread such distributions over three years to reduce the tax impact. Better yet, you can opt to put this money back into your retirement account—also within three years—and avoid paying taxes on the money altogether.

That said, emergency withdrawals are only available to those individuals with a valid COVID-19-related reason for early access to retirement funds.  These reasons include:

• • Being diagnosed with COVID-19;
  • Having a spouse or dependent diagnosed with COVID-19;
  • Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare due to COVID-19;
  • Have had a job offer rescinded or a job start date delayed due to COVID-19;
  • Experiencing adverse financial consequences due to an individual or the individual’s spouse’s finances being affected due to COVID-19; and
  • Closing a business owned or operated by an individual or their spouse or reducing its operating hours due to COVID-19.

Because early withdrawals may negatively impact your retirement savings, you should consult with your financial advisor and us before taking advantage of this provision. Also, check with your plan administrator to see if it’s available at your workplace because employers are not required to participate in this provision of the CARES Act.

Maximize tax-savings for 2020

While the deadline for filing your 2020 income taxes isn’t until April 15, 2021, with all of the new COVID-19 legislation, the earlier you start planning your taxes, the better. Please consult with your tax advisor and us for support in clarifying how these new changes will affect your return and strategies to maximize your tax savings for 2020 and beyond.

This article is a service of Ruberg Law PLLC. We don’t just draft documents; we ensure you make informed, empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™. During the session, you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this valuable session at no charge.