Last year was different something else, and guess what? Your tax return will also be. Here is our guide to what's new.
April 15th will be here before you know it – which means it's time to start thinking seriously about your 2020 taxes. Last year was quite significant, fiscally; not only did we get the typical adjustments of standard deductions and tax brackets, but legislation like the CARES Act also changed the ways in which certain types of expenses could be deducted.
In addition, you may have received unemployment benefits, taken a coronavirus. -related distribution from your 401 (k) or had unusually high medical bills by 2020 – and an unexpected fiscal year almost always leads to some surprises on the tax return.
We reached out to Betty Wang, CFP®, founder and CEO of BW Financial Planning and advisor at the XY Planning Network, to learn more about tax updates that may affect your 2020 tax return. It's always a good idea to talk to your own CPA or tax staff if you have specific questions about your tax liabilities – but you can use Wang's advice to help you narrow down the questions you plan to ask.
In this article:  Tax Classes
"For 2020 tax returns, you should be aware of the tax class increases," says Wang – so let's take a look at the 2020 tax brackets to see where you can fall.
|Marginal tax rate||Individuals registering separately||Married couple applying jointly|
|37%||Income over $ 518,400||Income over $ 622,050|
|35%||Income over $ 207,350||Income over $ 414,700|
|32%||Income over $ 163,300||Income over $ 326,600|
|24%||Income over $ 85,525||Income over $ 171,050  22%||Income Over $ 40,125||Income Over $ 80,250  12%||Income Over $ 9,875||Income Over $ 19,750|
Rem In October, these tax limits represent marginal tax rates – meaning that if you are a single file that earned $ 100,000 by 2020, only $ 14,475 over $ 85,525 will taxed at 24% tax rate. The rest of your income will be taxed proportionally according to the level within which it falls.
For more information, read the IRS Notice on Tax Rates for 2020.
If you are trying to choose between specifying your deductions and taking the standard deduction, remember that the standard deduction increased in 2020. (If you forgot is the standard deduction is the amount of your income that is not subject to federal income tax.) The standard deduction usually increases year over year, so this year's increase probably won't come as much of a surprise – but it's still worth noting.
"The standard deduction for 2020 increased to $ 12,400 for single filers and $ 24,800 for married couples applying jointly," Wang explains. As you may remember from filling in your taxes for 2019, the standard deductions were previously set at $ 12,200 for single filers and $ 24,400 for married couples filing jointly – meaning you can deduct another $ 200 in 2020 if you are leaving in solo, or $ 400 if you do together as a couple.
For more information, read the IRS standard deduction guide.
Many of us decided to prioritize charity donations in 2020 – and the IRS is ready to reward us for our generosity. "If you use the standard deduction, which over 90% of us do, you can deduct up to $ 300 in donations for 2020 due to the CARES law," explains Wang.
Donations must be cash (non-cash assets can not be covered by the tax deduction) and may include checks or online payments. Only donations to qualified organizations, which the IRS describes as "those that are religious, charitable, educational, scientific or literary in nature", are eligible for deductions.
For more information, read the IRS guide on how the CARES Act changes charitable deductions.
"If 2020 gave you a large amount of medical bills, you should check if your own medical expenses exceed 7.5% of your adjusted gross income," Wang advises. All healthcare costs that exceed 7.5% of your AGI can be specified in Schedule A – which means that it may be worth doing the math to see if you are better off with the specified deduction or standard deduction.
This deduction only applies to non-reimbursable medical expenses (hence the term "out-of-pocket") and includes only that portion of your medical expenses that is greater than 7.5% of your adjusted gross income. If your AGI 2020 is $ 100,000 and you have $ 8,000 in reimbursed medical expenses, for example, you can only include $ 500 of those expenses as a specified deduction.
It may not sound like much, but it's more than you used to be able to deduct – previously you could only specify non-reimbursed healthcare costs that exceeded 10% of your AGI. "This 7.5% threshold was made permanent in 2020," explains Wang.
For more information, read the IRS Guide to Medical and Dental Costs.
401 (k) distributions
"If you took a coronavirus-related distribution of your 401 (k) as part of the CARES Act, you have some choices to make," says Wang. you have three years to repay the money. You get back all the taxes you paid. ”
Remember that you are not obliged to return your coronavirus-related distribution – but if you decide to put the money back in your 401 (k) you may want to prioritize these payments so that you do not miss potential market growth. "It is generally recommended that you return the money as soon as possible if you do not need the money so that you can get back on track to save for your pension. ", Wang recommends.
If you choose not to return the money, remember that you owe tax on your distribution – but you can alleviate the burden by spreading these tax payments over three years.
For more information, read IRS-g uiden for coronavirus-related reliefs and pension plans. .
Many people received unemployment benefits in 2020 due to coronavirus-related furloughs and redundancies – and although these unemployment benefits are usually taxed, the latest coronavirus stimulation package changed the rules for people filing new legislation. for people who have already submitted their taxes by 2020? We'll have to wait for IRS guidance before giving any final advice – but you may need to file Form 1040X to change your previously filed taxes.
If you received unemployment benefits in 2020, you should receive form 1099-G, Some government payments. This form shows the total amount of unemployment benefit received, as well as any federal income tax that has already been withheld. You must report that information in both Schedule 1 and on your Form 1040.
For more information, read the IRS Guide to Unemployment Benefit and any updates related to the new Coronavirus Relief Act – and do not forget that your unemployment benefits may also be taxable at the state level. .
Identity Theft Protection
There's another tax tip Betty Wang wants you to remember when filing for 2020 – and that's considering signing up for an IRS Identity Protection PIN.
"As tax-related identity theft increases, the IRS offers all taxpayers a way to add another layer of protection through their identity protection PIN program," Wang explains. “The program was historically available only to victims of identity theft. This is the first year it is available to all taxpayers.
Identity Protection Pin, or IP PIN, is a six-digit number that helps to verify your identity on your self-declaration. There are a number of tax-related scams out there – the IRS recently listed a "dirty dozen" – and signing up for an IP PIN can provide an extra level of security that could prevent someone else from filing a return under your name or claiming it. a tax refund on your behalf.
For more information, read the IRS Identity Protection PIN FAQ – and consider adding "get an IP PIN" to your to-do list of tax-related items that must be completed by April 15th.
You get everything ready. You always do. And hey, if you do not, you can always request a tax extension.
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Haven Life is a customer-centric life insurance agency that is supported and wholly owned by the Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigating life insurance decisions, your personal finances and your general well-being can be refreshingly easy.
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