January 29, 2021 | Money Management

10 Important Things to Know for Filing Your 2020 Taxes

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10 Important Things to Know for Filing Your 2020 Taxes

Quorum

Jan 29 2021, 07:55pm


Editor’s note: Before altering your tax strategy, it’s important to sit down and consult with your tax specialist. They have a firm understanding of your wants and needs, as well as the knowledge of tax law required to maximize your wealth potential.

Quorum is not affiliated with any of the companies mentioned in this article and derives no benefit from these businesses for placement in this article.

Benjamin Franklin famously called taxes one of life’s few certainties. Annual IRS and state tax updates are now also a regular occurrence. This year, that includes changes due to the COVID-19 Stimulus Plan.

You can expect certified tax preparers and reputable tax software to account for all tax law changes when calculating your return, but here are some of the most important things for you to know about this tax season.

1. Federal Tax Day Goes Back to Normal

In 2020, the IRS extended the time you had to file your 2019 federal tax return because of the coronavirus pandemic, which continues even now. But so far, the IRS has not indicated a delay in the 2021 federal due date. Two of the largest tax preparation companies, TurboTax and H&R Block, both indicate that federal 2020 tax returns are due on Thursday, April 15, 2021.

2. Same Tax Rates, Updated Tax Brackets

The United States uses a progressive marginal tax rate. This means every dollar of income is taxed at a certain rate that increases as that income rises. The 2020 marginal tax rates remain the same as 2019: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

However, the 2020 tax brackets have been adjusted for inflation. Your tax bracket is based on the total amount of your taxable income and your filing status of single, married filing jointly, head of household or married filing separately.

As an example, here’s how it breaks down for a married couple filing jointly with 2020 taxable income  (after deductions/exemptions/etc) of $80,000.

2020 Marginal Tax Rate Married Filing Jointly Tax Bracket Taxable Income Amount x Marginal Tax Rate = Tax Due
10% $0-19,750 $19,750 of their income is taxed at 10% = $1,975
12% $19,750 – $80,250 $60,250 or the remainder of their income is taxed at 12% =  $7,230
Total Tax Due $80,000 of taxable income = $9,205

3. Adjusted Tax Brackets for Long-term Capital Gains

The tax rates on gains from assets held more than one year are still 0%, 15% and 20%. However, the corresponding capital gains tax brackets have been adjusted for inflation, increasing their upper limits. This means you pay $0 tax on long-term capital gains at the following income levels:

  • Single or Married Filing Separately: Up to $40,000
  • Married Filing Jointly: Up to $80,000
  • Head of Household Filer: Up to $53,600

4. Higher Standard Deduction

To adjust for inflation, the  2020 standard deductions have gone up. This gives you a little more cushion before it makes sense to itemize your deductions to reduce your tax liability to the greatest extent possible.

Filing Status 2020 Standard Deduction
Single and Married Filing Separately $12,400
Head of Household $18,650
Married Filing Jointly and Qualifying Widow(er)s $24,800

5. Stimulus Check: Not Taxable

If you received a stimulus check as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you don’t need to worry about it raising your taxable income. The stimulus payments were structured as advance tax credits for your 2020 tax return and therefore are not taxable.

6. Unemployment Benefits: Taxable

On the other hand, just like every year, any unemployment compensation you received in 2020 does count toward your taxable income for the year, which may come as a surprise to those who’ve never filed for unemployment before. If you didn’t voluntarily choose to withhold federal tax from your unemployment benefits or otherwise pay it through quarterly estimated taxes, you should be prepared for these benefits to increase your potential 2020 tax liability.

7. Extra Charitable Giving Benefit

Prior to 2020, only those who itemized their deductions benefited taxwise from their donations to charity. But thanks to the CARES Act, the IRS says even “taxpayers who don’t itemize may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations.”

8. Home Office Deduction Limits

Did your employer send you home to work remotely because of the coronavirus? You might think that means you can take a home office deduction on your 2020 tax return. Unfortunately, the 2017 Tax Cuts and Jobs Act did away with that deduction for employees.

But there’s good news if you work for yourself. The home office deduction is still available to the self-employed, assuming you use the space regularly and exclusively for work.

9. 529 Withdrawals

Money taken out of  529 plans must be used for qualified education expenses in order for it not to be taxed and penalized. What if your school issued a coronavirus-related refund for some of your education expenses? You had 60 days from the refund date to return the money to the institution holding the 529. Otherwise, the refund could be considered a taxable distribution.

10. Side Gig Income

Finally, if you took on a side gig to make it through the pandemic, that income is taxable, too. You should receive a 1099-MISC form from any company that paid you $600 or more on a contract basis. Below that amount, it’s up to you to keep track of the income earned for tax purposes.

For more specific 2020 tax information or advice, talk to a qualified tax professional.




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