2020 tax law changes

Economic Impact Payments (Stimulus checks)

One of the biggest questions we will be asking is: “Did you receive your stimulus payment, and is so how much?”. The stimulus payment you received is NOT taxable income, but actually is a “tax credit” that applies to your 2020 tax fling year.

If you did not receive a payment (or your payment was incorrect) it will balance out when we file your 2020 tax forms, and you will receive the credit then.  If you received a payment and you should not have… no worries for now.  Currently there are no laws or ruling requiring you to pay anything back.

Charitable contributions:

Charitable contributions are still fully deductible if you itemize your deductions.  However with the new higher Standard Deduction ($12,400 per individual) it is difficult to itemize.

However for the 2020 tax year, you can claim up to $300 in charitable gifts “above-the-line”.  Basically the charitable gift is taken directly off of your Adjusted Gross Income (AGI) whether you itemize OR take the standard deduction.

Retirement accounts:

The CARES act removed the age limit to make contributions to an IRA.  What used to be capped at 70 1/2 years, is now unlimited.  BUT you must have “earned” income to be able to deduct the contribution from your taxable income.

Prior to 2020, you needed to begin taking required minimum distributions (RMDs) from their plans when you turned 70½ years old.  Under the SECURE Act and for distributions required to be made after Dec. 31, 2019, the age at which individuals must start taking distributions from these retirement plans has been increased from 70½ to 72. The RMD rules try to get taxpayers to spend retirement savings during their lifetimes instead of transferring wealth to beneficiaries.  A side benefit to the age thresh-hold change, was that you could choose NOT to take a required distribution in 2020.

Also under the CARES Act and for 2020 distributions, if you were financially impacted by the corona virus pandemic, you can take a distribution up to $100,000 and not be subjected to the 10% early withdrawal penalty. You can choose to distribute the taxable income calculation over a 3-year period, or you can also contribute the money back to your retirement plan within three years and treat the transaction as a direct rollover.  A word of CAUTION though, you must be able to prove that the draw from your retirement account is directly related to financial need due to the pandemic.

Alimony:

For divorces that were finalized after December 31st 2018, alimony is no longer deductible for the payer and included as income for the recipient. If you divorce was finalized prior to this date, spouses can still take advantage of the changes, but you should obtain legal advice as it will requre changes to your divorce agreement.

Tax changes for the self employed:

PPP loans – Most of our client are small businesses, and if you received less than $50,000 in PPP loans you can use the simplified form found here: PPP Loan Forgiveness Application Form 3508S (sba.gov)  It is basically 1-page, and documentation is NOT required.  However you might have to prove your position if you are ever audited, so still keep good records.

Earlier in 2020, there was fear that we would not be allowed to deduct the expenses you used the PPP loan proceeds for, which in effect would cause the loan proceeds to be “taxable”.  With the new Covid relief bill signed into law on December 27th, the IRS ruling has been reversed.  We can deduct the expenses, and not include the loan proceeds as income (if they have been forgiven).  If your PPP loan is not forgiven, it is recorded as like  regular loan on your books.

Corona virus sick leave – Employers can receive a credit when an employee was unable to work due to quarantine or covid-related illness, or caring for a dependent with covid. Self-employed individuals weren’t left out though! You can get a credit against the self-employment (SE) tax, which is “equivalent” to what you would have received if instead you were a W2 employee.  Of course the IRS made the calculation rather complex, but basically you can receive $511 in credit per day you were not able to work, up to 10 days.

New 1099 NEC forms – The old 1099-misc forms have been re-vamped to separate out the money earned as a sub contractor or sole proprietor.  If you have self-employed income, you will now receive a 1099-NEC (non-employee compensation).  The 1099-misc still exists, but the self-employed sectionhas been pulled out and given its own form,