Tax Season 2021: What You Need to Know About Your 2020 Tax Return

Tax Season 2021: What You Need to Know About Your 2020 Tax Return

You’re probably sick of even thinking about the year 2020. But, unfortunately, you probably still have the preparation of your 2020 tax return to take care of.

A lot has changed for the 2021 tax season. 

1.The COVID-19 Virus and Your Taxes

The COVID situation in 2020 extended the due date for individual tax return filings. However, in 2021 the deadline has reverted back to April 15, 2021. If you are not able to get your tax return filed by that date, you may request an extension all the way to October 15, 2021, but you must pay any taxes you estimate you will owe with your extension request which must be filed by April 15.

What Effect Does the Coronavirus Have on Your Taxes?

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you will receive a refundable tax credit up to $1,200 in the form of a refundable tax credit to reduce your taxes owing. The $1,200 credit is not taxable.

Paycheck Protection Program (PPP) Loans

The CARES ACT in an effort to assist struggling small businesses created Paycheck Protection Program (PPP) loans. The proceeds from the loans must be used to pay certain business expenses—payroll, rent, or interest on mortgage payments, and utilities. And as long as the business meets these qualifications, the loan can be forgiven. The loan forgiveness is not included in taxable income, and the expenses are deductible.

For those who were laid off from their jobs during the pandemic, many received unemployment benefits. Those benefits are taxable and those who choose not to have taxes withheld from these benefits will have to do so on their tax return.

2.Tax Rates and Brackets for the 2020 Tax Season

Tax rates and brackets – The percentage of your income that is taxed is based on the tax bracket you are in. Here are the brackets and rates for 2021

2020 Marginal Income Tax Rates and Brackets

2020 Marginal Tax Rates Single Tax Bracket Married Filing Jointly Tax Bracket Head of Household Tax Bracket Married Filing Separately Tax Bracket
10% $0–9,875 $0–19,750 $0–14,100 $0–9,875
12% $9,875–40,125 $19,750–80,250 $14,100–53,700 $9,875–40,125
22% $40,125–85,525 $80,250–171,050 $53,700–85,500 $40,125–85,525
24% $85,525–163,300 $171,050–326,600 $85,500–163,300 $85,525–163,300
32% $163,300–207,350 $326,600–414,700 $163,300–207,350 $163,300–207,350
35% $207,350–518,400 $414,700–622,050 $207,350–518,400 $207,350–311,025
37% Over $518,400 Over $622,050 Over $518,400 Over $311,025

3.A Slight Increase in the Standard Deduction for 2020

The standard deduction is an alternative to itemized deductions. Itemized deductions are things like mortgage interest, taxes, medical expenses, and charitable contributions. What you do is to total those deductions and compare them to your standard deduction. The larger of the two is deductible from your Adjusted Gross Income to arrive at your taxable income.

For the tax year 2020, the standard deduction went up slightly to adjust for inflation.

Filing Status 2019 2020
Single $12,200 $12,400
Married Filing Jointly $24,400 $24,800
Married Filing Separately $12,200 $12,400
Head of Household $18,350 $18,650

4.Itemized Deductions

As indicated above, you may “itemize” your deductions if they exceed the standard deduction. Here is a list of itemized deductions:

Interest Expense

The types of interest expenses that are eligible are mortgage interest for both your primary residence, which includes both your first and second mortgages. Mortgage interest for investment properties. Interest on some business loans including business credit card interest. Student loan interest. Personal credit card interest, auto loan interest and other types of personal consumer finance interest are not deductible. 

Taxes

There are four types of taxes you can deduct :

  1. State, local, and foreign income taxes
  2. Real estate taxes
  3. Ad valorem taxes on personal property 
  4. State and local sales taxes

Note that these taxes in the aggregate are allowable only up to $10,000.

Charitable Deductions

The CARES Act allows you to deduct up to 100% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken, in qualified charitable donations if you plan to itemize their deductions. Previously charitable deductions were limited in certain circumstances.

Medical Expenses

You can deduct medical expenses, subject to limitations. You can deduct medical expenses in excess of 7.5% of your adjusted gross income (AGI). Your AGI is the total of your income less adjustments for things like an IRA contribution. If your medical expenses do exceed 7.5 % of AGI, they must be included in your itemized deductions which may or may not exceed the standard deduction explained above.

Business Deductions

If you are self-employed are many deductions you can claim on your tax return—including travel expenses and the home office deduction if you use a part of your home to conduct business.

5.Credits

tax credit is a dollar-for-dollar reduction of your tax liability. If, for instance, your tax liability is computed to be $2,500, and you can qualify for a $1,000 tax credit, the credit can be used to reduce the amount you owe. In this case, your net amount owing to the IRS would be 1,500. 

While there are several tax credits in tax law, the most commonly used credits for individuals are:

The Earned income tax credit (EITC)

This credit is for low- and middle-income workers. If you earn less than $56,844 in 2020, you may be eligible for the credit. The amount of the credit is based on your earnings, filing status and number of children. The maximum credit for 2020 is 6,660.

The Child care tax credit

Families with kids can claim up to $2,000 per qualified child for married taxpayers with taxable income less than $400,000, and $200,000 for single parents.

6.Educational Expenses: 529 Plans and ESAs 

Many folks had to pull money from the 529 plan or Educational Savings Account (ESA)  during the pandemic. In order to avoid taxes on these withdrawals, the money must have been used for qualified educational expenses. However, a lot of colleges and schools that went remote or canceled classes this year, may have refunded some or all of the expenses you paid for using 529 or ESA withdrawals. In that instance, you have 60 days to return these funds to those accounts or be subject to them being taxable with an accompanying penalty for early withdrawal.

7.Retirement Plans: 401(k)s, IRAs and More

  • Prior to the CARES Act individuals were not allowed to withdraw funds from their 401 (k)s and IRAs, without penalty, until reaching age 59 ½. The CARES Act eliminated this penalty for such withdrawals up until the end of 2020. Note however that any such withdrawals are taxable.
  • If you have a traditional IRA, tax laws require you to begin making withdrawals once you reach the age of 70 ½. These withdrawals are called “required minimum distributions” (RMDs). The SECURE ACT pushed back the age for RMDs from traditional IRAs from 70 ½ to 72. In addition, the CARES Act allows seniors to skip RMDs altogether in 2020 without penalty.
  • The SECURE Act allows owners of traditional IRAs to keep putting money in their accounts past age 70 ½ starting in 2020. And these contributions are tax-deductible.
  • Finally, if you did take money out of a 401 (K) or traditional IRA in 2020, you will owe additional taxes on those withdrawals. If, however, you are able to put those funds back into those retirement accounts within three years, you can receive a refund of the additional taxes you had to pay.

Contact the Tax Professionals at Marshall Jones

Are you tired of trying to keep up with the ever-changing tax laws? You can contact Marshall Jones to set up an appointment to review your needs.