Due to inflation and corona virus legislation, there will be some key policy changes you will need to know in order to maximize on your tax return.
1. Required Minimum Distributions (RMD) For 2020 Were Waived
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), has waived RMD from retirement accounts for 2020. Since RMD is taxable income, this will mean that retirees will possibly owe less in 2021 federal incomes because they will have lower taxable income.
2. A Charitable Deduction Available To All
Typically, you can write off tax-deductible donations to charity on your federal tax return if you itemize your deductions rather than take the standard deduction.
In effort to encourage people to donate money to charity during the coronavirus pandemic, the CARES Act now allows taxpayers to deduct up to $300 in monetary donations in 2020, even if they take the standard deduction. This $300 deduction comes off your adjusted gross income (AGI) rather than as an adjustment to income.
3. Higher Standard Deductions
The change in standard deductions for the 4 standard tax filing types are as follows:
Married and filing jointly: $24,800
Married but filing separately: $12,400
Head of household: $18,650
Single: $12,400
The standard deduction option reduces the amount of your income that’s subject to federal taxes. So, if you are married but filing separately and you choose to use the standard deduction option over itemizing your deduction, the federal government will not tax the first $12,400 of your income.
4. Higher Income Brackets
Income tax brackets also tend to rise annually. For 2020, the income brackets are as follows for folks whose tax-filing status is single:
37% Tax Rate: Taxable income of more than $518,400
35% Tax Rate: Taxable income between $207,350.01 and $518,400
32% Tax Rate: Taxable income between $163,300.01 and $207,350
24% Tax Rate: Taxable income between $85,525.01 and $163,300
22% Tax Rate: Taxable income between $40,125.01 and $85,525
12% Tax Rate: Taxable income between $9,875.01 and $40,125
10% Tax Rate: Income of $9,875 or less
5. Higher Contribution Limits for (some) Retirement Accounts
You could save more money in several types of workplace retirement accounts.
The base contribution limit for 401(k) plans is now $19,500. The limit for catch-up contributions, which taxpayers age 50 and older can make, is now $6,500. If you are at least 50 years old, you can now contribute a total of $26,000 instead of $25,000 to a 401(k) for 2020.
6. Higher Contribution Limits for Health Savings Accounts (HSA)
The 2020 contribution limits for folks who are eligible for an HSA and have the following types of high-deductible health insurance policies are now the following:
Self-only coverage: $3,550
Family coverage: $7,100
7. Higher Income Limits for the Saver’s Credit
The Saver’s Credit which was formally known as the retirement savings contributions tax credit, has higher income limits for 2020. Now, more people can take advantage of this credit. You may be eligible for this credit in 2020 if your adjusted gross income (AGI) is not more than:
Married filing jointly: $65,000
Head of household: $48,750
All other tax-filing statuses: $32,500
8. Adoption Tax Credit
The tax credit for qualified adoption expenses is more valuable. The maximum allowable credit amount for 2020 is $14,300.
9. An Increase for Earned Income Tax Credit (EITC)
For 2020, both the income limits and the maximum credit amount for the earned income tax credit (EITC) are higher.
You will most likely be eligible for the EITC if your AGI is not more than:
Married filing jointly: $56,844
All other tax-filing statuses: $50,594
The maximum amount that the EITC is worth for 2020 is $6,660.
Although it is only up by $3, every penny counts, right?
10. A Higher Cap on Social Security Payroll Taxes
Not everything can be sunshine and unicorns. The maximum amount of a worker’s income that is subject to Social Security payroll taxes went up from $132,900 to $137,700 for 2020.