Between the far-reaching personal and financial effects of the COVID-19 pandemic (and the economic stimulus packages developed to provide some relief), the sensationalism of election year politics and the significant changes made to tax laws within the past 12 months, 2020 has been a roller coaster of a year, to say the least. And, as we approach the end of this year, American taxpayers could be affected in a number of ways.
1) Retirement Plans
Most of the changes that could affect your retirement account this year come from the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law late in 2019. However, the recently-passed Coronavirus Aid, Relief, and Economic Security (CARES) Act includes a few provisions affecting retirement plans, too.
SECURE and Your RMDs
For example, under the SECURE Act, the age for taking required minimum distributions (RMDs) from the Individual Retirement Accounts (IRAs) has increased from 70½ to 72. (This change only applies to account owners who turned 70½ after 2019.) The SECURE Act also allows those working past age 70½ to continue to contribute to their IRAs, which matches the current rules for 401(k)s and Roth IRAs.
The rules for withdrawing money from inherited IRAs and other workplace retirement accounts have also changed, and now require that the entire balance from inherited retirement accounts be withdrawn by beneficiaries within 10 years. Previously, beneficiaries could stretch withdrawals over their lifetimes, or the remaining life expectancy of the deceased IRA creator. (There are exceptions for surviving spouses, the disabled or chronically ill, minor children until they reach age 18 and beneficiaries who are not more than 10 years younger than the account owner.) The new, shorter payout period increases the income tax impact for beneficiaries, which enhances the attractiveness of the option to name a charity, like Drexel University, as a beneficiary. (Inherited accounts of individuals who died before 2020 aren't affected by this change.)
CARES and Your RMDs
The CARES Act includes retirement-related tax breaks for 2020. CARES allows seniors to skip their RMDs for calendar 2020 without penalty. Additionally, it waives the 10% penalty on pre-age 59½ payouts from retirement accounts for up to $100,000 of coronavirus-related needs, and allows the account owner three years to put the money back into the retirement account and undo any tax consequences from the distribution.
The CARES Act also allows account owners required to take RMDs to skip taking that payment for calendar 2020 without penalty.
Retirement Account Contributions
The 2020 contribution limit for traditional IRAs and Roth IRAs has stayed steady at $6,000 (plus $1,000 as an additional catch-up contribution for individuals age 50 and up). However, the allowed maximum for Roth IRA contributions increased. Contributions phase out in 2020 at adjusted gross incomes (AGIs) of $196,000 to $206,000 for couples and $124,000 to $139,000 for singles ($193,000 to $203,000 and $122,000 to $137,000, respectively, for 2019). Deduction phaseouts for traditional IRAs also start at higher levels in 2020, from AGIs of $104,000 to $124,000 for couples and $65,000 to $75,000 for single filers ($103,000 to $123,000 and $64,000 to $74,000 last year).
2) Tax Brackets
Federal income tax brackets for 2020 have been indexed for inflation and are slightly wider than they were in 2019. There are seven tax brackets for 2020.
2020 Tax Brackets for Single/Married Filing Jointly/Head of Household
| Tax Rate | Taxable Income (Single) | Taxable Income (Married Filing Jointly) |
|---|---|---|
| 10% | Up to $9,875 | Up to $19,750 |
| 12% | $9,876 to $40,125 | $19,751 to $80,250 |
| 22% | $40,126 to $85,525 | $80,251 to $171,050 |
| 24% | $85,526 to $163,300 | $171,051 to $326,600 |
| 32% | $163,301 to $207,350 | $326,601 to $414,700 |
| 35% | $207,351 to $518,400 | $414,701 to $622,050 |
| 37% | Over $518,400 | Over $622,050 |
3) Standard Deductions
Standard deduction amounts were increased for 2020. Married couples qualify for $24,800 ($24,400 in 2019), plus $1,300 for each spouse age 65 or older. Single taxpayers can claim a $12,400 standard deduction ($12,200 in 2019) and an additional $1,650 if they're at least 65. Blind people can tack on an extra $1,300 to their standard deduction ($1,650 if they're unmarried and not a surviving spouse). The personal exemption amount remains zero under the Tax Cuts and Jobs Act of 2017 (TCJA).
4) Capital Gains
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 ($39,375 in 2019) and $80,000 for joint returns ($78,750 in 2019). The 20% rate starts at $441,451 for singles ($434,550 in 2019) and $496,601 for couples filing jointly ($488,850 in 2019). (A 15% rate applies for filers with taxable incomes between the 0% and 20% thresholds.)
The 3.8% surtax on net investment income continues to apply to single people with modified Adjusted Gross Income (AGI) over $200,000 and for joint filers with modified AGI over $250,000.
5) Charitable Deductions
In order to encourage charitable contributions in 2020 (for any charitable purpose, not just contributions to charities related to the COVID-19 crisis) the CARES Act increased the maximum 60% of AGI charitable contribution limit to 100% of AGI limit for calendar year 2020. CARES also includes a new “above the line” deduction that allows non-itemizers to write off up to $300 of charitable cash contributions. As written, this deduction is permanent and does not expire at the end of 2020.
6) Estate taxes
The TCJA revived a number of tax breaks through 2020, including an increase in the lifetime estate and gift tax exemption. For 2020, this amount jumps from $11.4 million to $11.58 million ($23.16 million for couples) if portability is elected by filing IRS Form 706 immediately after the death of the first-to-die spouse. The estate tax rate remains steady at 40%.
7) Education Tax Breaks
The 2020 lifetime learning credit phases out at higher modified AGI amounts for couples—$118,000 to $138,000 ($116,000 to $136,000 for 2019). The AGI range for singles is $59,000 to $69,000 ($58,000 to $68,000 for 2019).
The income caps are also higher in 2020 for tax-free EE bonds used for education. The exclusion starts phasing out above $123,550 of modified AGI for couples and $82,350 for others ($121,600 and $81,100 for 2019). It ends at modified AGI of $153,550 and $97,350, respectively ($151,600 and $96,100 for 2019). The savings bonds may only be redeemed to pay for tuition and fees for college, graduate school or vocational school for the taxpayer, spouse or dependent.
There are also two expansions to 529 college savings plans starting in 2020. 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.
8) Medical Expenses
For taxpayers who itemize, the 2020 threshold for deducting medical expenses on Schedule A is 7.5% of AGI. The limits on deducting long-term-care premiums were increased for 2020. Taxpayers who are age 71 or older can deduct up to $5,430 per person ($5,270 in 2019). Filers ages 61 to 70 can deduct up to $4,350 ($4,220 in 2019). Those between the ages of 51 to 60 can deduct up to $1,630 ($1,580 in 2019). For people ages 41 to 50, the maximum deduction is $810 ($790 for 2019); for taxpayers age 40 and younger, it's $430 ($420 for 2019).
9) Alternative Minimum Tax
The exemption for the alternative minimum tax (AMT) have increased from $111,700 to $113,400 for couples and from $71,700 to $72,900 for single filers. The phaseout zones for the exemptions start at higher income levels as well—$1,036,800 for couples and $518,400 for singles and household heads ($1,020,600 and $510,300, respectively, for 2019).
In addition, the threshold for the 28% AMT tax rate is now above $197,900 of alternative minimum taxable income. (The rate applied to AMTI over $194,800 for 2019.)
10) Deduction for Pass-through Income
Self-employed people and owners of LLCs, S corporations and other pass-through entities can now deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $326,600 for joint filers and $163,300 for others ($321,400 and $160,700, respectively, for 2019).