Congress did not pass a major tax overhaul during 2020, but it still made several substantive changes to the U.S. Tax Code. Many of those changes were included in legislation passed to boost an economy that is reeling from the COVID-19 pandemic.
The new changes to the Tax Code, coupled with regularly scheduled cost of living adjustments, mean that Americans will see some changes to their 2020 personal income tax returns this spring. Taxpayers should be aware of these changes and understand how they will impact the amount of tax due and their future tax planning.
IRS Moved Back the 2021 Filing Deadline
The Internal Revenue Service took steps to ease the financial burden of the 2021 tax season by pushing back the filing deadline for 2020 returns from April 15 to May 17. The IRS said it extended the deadline to assist taxpayers in navigating the unusual circumstances created by the pandemic.
This is the second straight year the IRS pushed back the filing deadline after moving it to July 15, 2020, for 2019 individual tax returns.
The May 17 filing extension does not apply to estimated tax payments, which are still due on April 15.
Stimulus Payments Were Actually Tax Credits
The IRS issued two rounds of direct economic stimulus payments to taxpayers in 2020 as part of COVID-19 relief packages. What most taxpayers who received the “economic impact payments” did not notice was that they were actually 2020 recovery rebate tax credits being paid early. Since tax credits are not taxable as income, you will not pay federal income tax on the rebate recovery credits you received in 2020.
If you already received the entire amount of your rebate recovery credit, you will not need to claim it on your 2020 tax return. But if you were eligible for the credit and either did not receive it or were not paid the full amount, you will need to file a 2020 federal income tax return to claim the credit, even if you are not required to file a return for 2020.
The Standard Deduction Was Increased
Most taxpayers who do not itemize their federal income tax deductions qualify for the standard deduction. The size of the deduction varies based on your filing status, but it is adjusted for inflation each year. For the 2020 tax year, the IRS has increased the standard deduction by the following amounts:
- Individual taxpayers or married taxpayers filing separately: From $12,200 for 2019 to $12,400 for 2020
- Married taxpayers filing jointly: From $24,400 to $24,800
- Heads of households: From $18,350 to $18,650
A New Deduction for Charitable Contributions
To encourage people to give to charity during the pandemic, the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act added a provision to the Tax Code that lets taxpayers who claim the standard deduction claim an additional deduction of up to $300 in donations. Normally, taxpayers who claim the standard deduction cannot claim a deduction for charitable contributions, but the CARES Act allows the deduction for cash donations made in 2020.
Early Withdrawal Penalties Suspended
The CARES Act allowed individuals impacted by COVID-19 to withdraw up to $100,000 from their 401(k) or other tax-advantaged retirement accounts during 2020 without paying the 10% early withdrawal penalty. In most years, if you withdraw money from a retirement account before you are 59 ½ you will be subject to a 10% early withdrawal penalty.
You will still be required to pay the federal income tax on the amounts you withdraw, but you can spread your payments over three years. For example, if you were under the age of 59 ½ and withdrew $9,000 from a retirement account to cover expenses after being impacted by COVID-19, you would include $3,000 of that amount in your 2020 income, $3,000 in your 2021 income, and $3,000 in your 2022 income.
Instead of paying tax on the early withdrawals, a taxpayer also has the option of contributing the withdrawn amount back to the retirement plan within three years, and the transaction will be treated as a direct rollover.
Some Expired Provisions Extended for 2020
Congress passed the Taxpayer Certainty and Disaster Tax Relief Act in December 2019 to extend more than 30 Tax Code provisions that had expired so that they would be available to taxpayers for 2020. The extended provisions that expired at the end of 2020 included:
- The deduction for mortgage insurance premiums
- The deduction for higher education tuition and fees
- The exclusion from gross income for the discharge of debt income from qualified principal residence debt
- The nonbusiness energy property credit