Tax Season Kicks Off
The 2017 Tax Cuts & Jobs Act (TCJA) is still in effect for 2020 returns, but a flurry of legislation will make your tax returns a little more complicated. The Internal Revenue Service will not begin processing tax returns until at least February 12 because of system updates that will need to be made to handle a number of pieces of key legislation, including the most recent round of Economic Impact Payments. While most taxpayers should expect refunds to be direct deposited within 3-4 weeks of filing, the IRS is not expected to begin depositing refunds until late February or early March this year.
First, taxpayers will need to verify stimulus payments they received. These payments are treated as an advanced tax credit, and while you do not have to repay any excess stimulus received, you may be eligible for additional stimulus money. For example, the birth of a child or a significant change in income may impact your stimulus payment for the year. Both payments (if received) must be reported on your tax return this year.
Charitable Contribution Deduction
Second, taxpayers who do not normally itemize (and take the standard deduction) can take up to a $300 charitable contribution as an adjustment to income (doubled for married filers). This means you can get a tax deduction for charitable contributions even if you normally don’t itemize.
A number of key tax extenders are in place for your 2020 returns:
· Mortgage Insurance Premiums may be deducted in addition to mortgage interest.
· The tuition and fees deduction remains in place for 2020
· The residential (nonbusiness) energy credit for items like solar panels and high efficiency improvements remains in place.
· The medical expense deduction remains at 7.5% of adjusted gross income instead of 10% as previously required under the Affordable Care Act.
Required Minimum Distributions
Retired taxpayers normally take required minimum distributions (RMDs) from retirement plans by age 70 ½, but the current tax law allows retired taxpayers to defer those distributions until age 72. That provides a little extra time for taxpayers to grow their tax-deferred retirement plans.
Many key tax credits remain in full effect this year, so don’t forget to obtain this information for your tax preparer.
Child Tax Credit
One of the most family-friendly tax benefits is the Child Tax Credit. Current tax law provides for a credit of up to $2,000 per child under age 17 at year-end. Up to $1,400 of the credit is refundable (meaning you can receive the credit even if your tax liability is zero). The credit phases out for married taxpayers with more than $400,000 of income and heads of household with income exceeding $200,000.
The $500 credit for dependents other than children remains in place this year, and is available for families whose children are over 17, away at college, or have other relatives living in your home such as extended family members.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) has increased to a maximum amount of $6,660 for taxpayers with 3 or more qualifying children. The credit varies on your income and the number of children in your household, and was designed to help lower-income taxpayers.
Child and Dependent Care Credit
This popular credit is worth up to $600 per child (maximum of $1,200 for two or more children) as a subsidy for childcare costs for working parents. Married filers and heads of household may claim the credit for their children under 13 years old. There is no income limit, but there is a sliding scale of the credit as a percentage of costs incurred.
College Tax Credits
The American Opportunity Credit provides up to $2,500 in tax credits for the first $4,000 spent on qualifying expenses annually for the first four years of undergraduate college education. The Lifetime Learning Credit is an alternative benefit that pays you back 20% of the first $10,000 of college tuition and expenses, and has no limit on the number of years it is available.
Savers Tax Credit
An often-overlooked credit is the Savers Tax Credit that has a maximum value of $2,000 off your income tax. Married taxpayers with income up to $48,000 ($32,000 for single filers) may claim a tax credit up to 50% of their retirement contributions to plans such as 401k, 403b or IRAs.
Keep in mind that most tax credits have income limitations of some type. Other credits are also in the tax law, so be sure to do your research and ask your tax preparer if you qualify for them.