2020 Tax Update

As in prior years, we are incorporating our tax update as part of our website instead of a separate mailing.
 
Last year, we discussed The SECURE Act (passed December 20, 2019) as it had many provisions that impacted your tax return.  The CARES Act was passed in 2020.  Under the CARES Act, most Americans received a stimulus check in 2020 for $1,200 ($2,400 for couples filing jointly), plus $500 for each child under age 17.  These amounts were phased out for joint filers with adjusted gross income above $150,000 or single filers with adjusted gross income about $75,000.
 
A second round of stimulus checks ($600 per person; $1,200 per couple filing jointly; $600 per child under the age of 17) was approved in late December.  Stimulus payments were sent out beginning late December and will continue being sent out until January 15, 2021.
 
Technically, your stimulus checks were an advance payment of a special 2020 tax credit known as the recovery rebate credit.  When you file your 2020 tax return, you will have to reconcile the stimulus checks you received with the recovery rebate credit you are entitled to claim.  If the stimulus payments received were less than your credit amount, you will receive an additional refundable tax credit equal to the difference.  If your stimulus checks were more than your credit amount, you will not have to repay the difference to the IRS in most cases.  Also, the Stimulus payments are not taxable.
 
Here are some of the highlights of the legislation passed recently that will impact your 2020 return:
  • REPEAL OF MAXIMUM AGE FOR TRADITIONAL IRA CONTRIBUTIONS – For contributions made for tax years beginning after December 31, 2019 The SECURE Act (passed December 20, 2019) repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70 ½.
  • PENALTY-FREE PLAN WITHDRAWALS FOR BIRTHS OR ADOPTIONS – For distributions made after December 31, ,2019, the SECURE ACT provides for penalty-free withdrawals from retirement plans for a “qualified birth or adoption distribution” – namely, a distribution to an individual if made during the one-year period beginning on the date on which the child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.  An eligible adoptee means any individual (other than a child of the taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of self-support.  The maximum aggregate amount of a qualified birth or adoption distribution by and individual with respect to any birth or adoption is $5,000, applied on an individual basis (so each spouse separately may receive $5,000 of birth or adoption distributions).
  • INCREASE IN AGE FOR REQUIRED BEGINNING DATE FOR MANDATORY DISTRIBUTIONS – Under the SECURE Act, the Required Beginning Date (RBD) for IRA’s is April 1, following the calendar year in which the IRA owner attains age 72.  For employer-sponsored retirement plans, for non-5% company owners is April 1, following the later of the calendar year in which the employee attains age 72 or retires.  For an employee who is a 5% owner, the RBD is the same as for IRA’s even if the employee continues to work past age 72.  In a conforming change, where an IRA or retirement plan account owner dies before the RBD and the spouse is the account’s beneficiary, the spouse will be able to delay distributions from the decedent’s account until December 31 of the year in which in which the decedent would have attained age 72.  These changes are effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after that date.  Additionally, the CARES Act allows seniors to skip their 2020 RMD’s without penalty.
  • FELLOWSHIPS - Beginning in 2020, fellowships, stipends or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA contributions.
  • POST DEATH REQUIRED MINIMUM DISTRIBUTION RULES MODIFIED – Generally effective for distributions with respect to employees (or IRA owners) who die after December 31, 2019 (see below for exceptions), the SECURE Act modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances (including annuity contracts purchased from insurance companies under defined contribution plans or IRAs) upon the death of the account owner.
Under the SECURE Act, the general rule is that after an employee (or IRA owner) dies, the remaining account balance must be distributed to designated beneficiaries within 10 years after date of death.  This rule applies regardless of whether the employee (or IRA owner) dies before, on, or after the required beginning date unless the designated beneficiary is an eligible designated beneficiary (see below).
 
An exception to the 10-year rule for post-death required minimum distributions applies to an eligible designated beneficiary.  This is an individual who, with respect to the employee or IRA owner, on the date of his or her death, is:
 
(1) The surviving spouse of the employee or IRA owner;
(2) A child of the employee or IRA owner who has not reached majority; 
(3) A chronically ill individual as specially defined in Code Sec 401(a)(9)(E)(ii)(IV); and
(4) Any other individual who is not more than ten years younger than the employee or IRA owner.
 
Under the exception, following the death of the employee or IRA owner, the remaining account balance generally may be distributed (similar to pre-Act law) over the life expectancy of the eligible designated beneficiary, beginning in the year following the year of death.
 
Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years after the death of the eligible designated beneficiary.  After a child of the employee or IRA owner reaches the age of majority, the balance in the account must be distributed within 10 years after that date.
 
These changes generally apply to distributions with respect to employees or IRA owners who dies after December 31, 2019.
 
  • CARES ACT RETIREMENT ACCOUNT DISTRIBUTIONS - The CARES Act also included the following tax provision.  The 10% penalty on pre-age-59 ½ payouts from retirement accounts for up to $100,000 of coronavirus-related payouts.  A coronavirus related distribution can also be included in income in equal installments over a three-year period, and you have three years to put the money back into your retirement account and undo the tax consequences of the distribution.  If you have taken advantage of this coronavirus-related easing, you must attach Form 8915-E to your return to spread out the tax on the distributions.   
  • 2020 and 2021 401(K) AND IRA CONTRIBUTIONS - The maximum 401(k) contribution for 2020 is $19,500 plus an allowable catch-up contribution of $6,500 for those age 50 and up.  The maximum IRA contribution for 2020 is $6,000 plus an allowable catch-up contribution of $1,000 for those age 50 and up.  These limits remain unchanged for 2021.
  • KIDDIE TAX AMENDMENT – The SECURE Act adds a provision to repeal the kiddie tax measures that were added by TCJA so that unearned income of children would be taxed under the pre-TCJA rules and thus would not be taxed at trust / estate rates (essentially reinstates the rules in place in 2017).  This change is effective for tax years beginning after December 31, 2019, but taxpayers may elect to apply it to tax years which begin in 2018, 2019, or both (as specified by the taxpayer in such election).
  • LONG TERM CAPITAL GAIN TAX RATES - Tax rates on long-term capital gains and qualified dividends did not change for 2020, but the income thresholds to qualify for the various rates did go up.  In 2020, the 0% rate applies for individual taxpayers with taxable income up to $40,000 on single returns, $53,600 for head-of-household filers and $80,000 for joint returns.  The 20% rate for 2020 starts at $441,451 for single filers, $469,051 for head of household filers, and $496,601 for couples filing jointly.  The 15% rate is for filers with taxable income between the 0% and 20% break points.

The 3.8% surtax on net investment income stays the same for 2020.  It kicks in for single people with modified adjusted gross income over $200,000 and for joint filers with modified adjusted gross income over $250,000.

  • CHARITABLE DEDUCTION FOR NONITEMIZERS - Nonitemizers can write off up to $300 of charitable cash contributions.  This write-off is per return married couples who file jointly can only deduct $300, not $600.
  • TAX CREDITS FOR SELF-EMPLOYED TAXPAYERS - The FAMILIES FIRST CORONAVIRUS RESPONSE ACT included tax relief for self-employed people who cannot work because of the coronavirus.  The law forces many employers to provide paid sick and family leave for workers affected by the virus.  However, tax credits against the self-employment tax are also allowed for self-employed people who cannot  work for a reason that would entitle them to coronavirus-related sick or family leave if he or she were an employee.  (Employers also get tax credits to help then pay for the paid leave they are required to give their employees.)
  • EXPANSION OF 529 COLLEGE SAVINGS PLANS - There are two expansions to 529 College Savings Plans starting in 2020.  First, funds can now be used to pay for fees, books, supplies and equipment for certain apprenticeship programs.  In addition, up to $10,000 in total (not annually) can be withdrawn to pay off student loans.
  • SOCIAL SECURITY AND SELF-EMPLOYMENT TAX DEFERRAL - The CARES ACT lets employers defer payment of the Social Security taxes they owe on wages paid from March 27 through December 31, 2020.  Self-employed people can defer 50% of their self-employment tax.  Employers affected by the coronavirus can also claim a new payroll tax credit for 2020 if they retain and continue to pay their workers.  
DISASTER ACT EXTENDED CERTAIN PROVISIONS THAT EXPIRED OR WERE SET TO EXPIRE:
 
  • Exclusion from gross income of discharge of qualified principal residence indebtedness was retroactively extended to discharges of indebtedness before January 1, 2021.
  • The treatment of mortgage insurance premiums as qualified residence interest (subject to a phaseout) was extended through 2020 for amounts paid or incurred after Dec 31, 2017.
  • The code provides that, individuals, for 2017 and 2018, could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses  exceeded 7.5% of AGI.  The Disaster Act extends this threshold of 7.5% for tax years beginning after Dec. 31, 2018 and before Jan. 1, 2021.
  • The Code provides and above-the-line deduction for qualified tuition and related expenses for higher education.  The deduction is capped at $4,000 and subject to a phaseout.  The Disaster Act retroactively extends this deduction through 2020.  This applies to tax years beginning after Dec. 31, 2017.
  • The code provides a credit for purchases of nonbusiness energy property.  The Code allows a credit of 10% of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences.  The Code allows credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans, and is subject to a lifetime cap of $500.  The Disaster Act retroactively extends this credit through 2020.  This applies to property placed in service after Dec. 31, 2017.
  • The Code provides a credit for purchases of new qualified fuel cell motor vehicles.  The Code allows a credit of between $4,000 and $44,000, depending on the weight of the vehicle, for the purchase of such vehicles.  Other vehicles, depending on their fuel efficiency, may qualify for an additional $1,000 to $4,000 credit.  The Disaster Act extends this credit through 2020.
  • The Code provides a 10% credit highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500).  Battery capacity within the vehicles must be greater than or equal to 2.5 kilowatt-hours.  The Disaster Act extends this credit so that it applies to vehicles acquired before Jan. 1, 2021.
Taxpayers with financial interests outside of the USA, must be careful to follow the somewhat intricate tax reporting rules with respect to these investments and holdings.  A person with a financial interest in or signature authority over one or more accounts in a foreign country has historically filed, at the very least, a FinCEN 114 form if the aggregate value of all foreign accounts exceeded $10,000 at any time during the year.  This was commonly referred to as an FBAR and was due on or before June 30 for the previous calendar year.  Beginning with tax year 2016, the FBAR is now due April 15 for the previous calendar year.  So the FBAR for 2017 is due April 15, 2018 and it must be filed electronically.  The initial due date can be extended for a six month period to October 15, 2018.  For larger foreign account balances and certain foreign trust accounts, there are additional forms that need to be filed, some of which need to be attached to your current federal income tax return.  The penalty for failure to file these forms or make the appropriate disclosures are very large, so be sure that you are very careful in this area.  Be sure to let us know of any foreign accounts that you have regardless of whether they generate any income when you send in your tax information.
 
As State tax rates have continued to rise, taxpayers owning multiple homes have explored changing their residence for tax purposes to reduce their state tax liability.  The states are getting more aggressive in challenging taxpayers who don’t follow all the rules to effectively change their tax residence.  Please call our office if you are considering changing your residence for tax purposes.
 
If you have any questions or feel some of these changes impact you, please do not hesitate to call our office.