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The last you want to be thinking about now is next year’s tax return. This year has been chaotic, frightening, confusing, stressful, and mostly exhausting. So piling on the thought of taxes sounds… taxing.
But this is exactly the time to think about it, because you can still make changes that will affect your 2020 tax bill – the one you’ll file in 2021.
There have been so many changes that it’s hard for even CPAs to keep up. But those changes will impact your 2020 tax bill. And since those changes came at different times in different tax laws, you’ll have a hard time pulling them together.
But there are three major issues that will affect almost everyone. Here’s what you need to know about the 3 biggest changes issues affecting your 2020 taxes.
- Remember the stimulus payments? They’ll show up on your taxes.
Generally, those payments were:
- $1,200 for single adults
- $2,400 for married couples
- $500 for each dependent child under age 17
Your income had to be below specific cut-offs in order to qualify, so your payment may have been smaller… or you may not have gotten one.
Now, technically, those payments connect to your 2020 return – the one you’ll file next April. They were advance payments on a special bonus credit for next year. But since we all needed the money ASAP, the IRS gave it to us early… in advance.
Since we (of course) haven’t filed our 2020 taxes yet, the IRS guessed who would qualify for the payments based on 2019 info (or 2018 info for people who hadn’t filed 2019 taxes yet).
Because of that, you may have gotten more money than you should have… you may have gotten less… or you may have gotten nothing. All of that will sort out when you file your 2020 taxes.
Here’s the really important part:
If you got less money than you should have, you will get more money when you file your 2020 taxes. You may be in this situation if:
- you earned less in 2020 than in 2019
- you had a child in 2020
- you were a dependent in 2019 but not in 2020
- you didn’t file a tax return in 2018 or 2019
- you switch off years claiming a child (due to divorce) and 2020 is your year
So when you file in 2021, you’ll either get a bigger refund or you’ll pay less if you owe money.
Then there’s the flip side. You may have gotten more money than you should have. You may be in this situation if:
- you earned more in 2020 than in 2019
- you have a child who turned 17 in 2020
- you switch off years claiming a child (due to divorce) and 2020 is not your year
If this is your situation don’t worry – you don’t have to pay any of it back.
2. A lot of rules changed for Retirement Accounts
The tax rules for retirement accounts changed drastically for 2020. Between the CARES Act, the SECURE Act, and the 2017 Tax Cuts and Jobs Act (TCJA), you might be confused about which rules apply. Here are the most important changes… and they’re all better for you:
- You don’t have to start taking money out of retirement accounts – called Required Minimum Distributions, or RMDs – until age 72.
- You don’t have to take any RMDs in 2020. If you did take one, even if it was back in January, you can put the money back without any tax effect.
- You can take up to $5,000 out of a retirement account penalty-free if you have or adopt a child.
- You can take up to $100,000 out of your retirement account during 2020 penalty-free for Covid-related reasons, like a job loss or medical expenses.
- Instead of having to pay taxes all at once on this withdrawal, you can spread the tax bill out over 3 years
- You can pay that money back within 3 years and get a refund for any related taxes you paid
3. Extra tax breaks for making charitable donations
One of the great things about 2020: Generosity. In the face of overwhelming crises coming one after another, we’ve reached deep into our pockets to help other people. Most of us don’t donate because of the tax break – we do it because we genuinely care and want to help.
Still, getting a tax break for donations frees up more money for giving. And for the first time, you can get a tax break whether or not you itemize deductions.
If you itemize: Usually, there’s a limit on the amount charitable contributions you can deduct, but not this year. For tax year 2020, you can deduct cash contributions for up to 100% of your adjustable gross income. That means you can effectively zero out your income… and owe no taxes.
If you don’t itemize: For tax year 2020, you can get a tax deduction for your cash donations even if you don’t itemize. There will be a special line on your tax return that allows you to subtract $300 of cash donations directly from your income.
With so much going on and so many changes, it will be a relief to have someone else deal with your taxes… even if you normally DIY. Let’s talk about how I can make your life at least a little bit easier. Contact me here to schedule your free 30-minute 2020 tax consultation, and we’ll see if we’re a good fit. But contact me soon, because spaces are filling up quickly.