December 23, 2020
Although 2020 was anticipated to be a quiet year, the funding bills signed by President Trump in December 2019 and the coronavirus stimulus packages enacted in March 2020 have created a long list of changes.
Direct stimulus payments
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, most Americans received a stimulus check in 2020 for $1,200 ($2,400 for couples filing jointly), plus $500 more for each child under age 17. The payments were phased out for joint filers with adjusted gross incomes above $150,000, head-of-household filers with AGIs above $112,500, and single filers with AGIs above $75,000. This stimulus payment was an advance payment of a special 2020 tax credit known as the recovery rebate credit claimed on your 2020 federal return.
Most of the changes are contained within the SECURE Act, which was signed into law late in 2019, although the CARES Act includes a few provisions also impacting retirement accounts.
- Under the SECURE Act, the beginning age for taking a required minimum distribution (RMD) rises from 70½ to 72. This change only applies to account owners who turn 70½ after 2019.
- The CARES Act allows seniors to skip their RMDs in 2020 without penalty.
- The SECURE Act also allows owners of traditional IRAs to make contributions past the age of 70½ starting in 2020.
- Those having a baby or adopting a child may now take distributions from IRAs and 401(k)s of up to $5,000 without having to pay the 10% early withdrawal penalty.
- Beginning in 2020, fellowships, stipends, or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA contributions.
- The rules for withdrawing money from inherited IRAs and workplace retirement accounts are tightened by the SECURE Act. Many accounts now need to be fully distributed within 10 years of the death of the IRA owner or 401(k) participant. Exceptions allow payouts over the beneficiary’s life expectancy for surviving spouses, the disabled or chronically ill, minor children until they reach 18 and beneficiaries who are not more than 10 years younger than the account owner. Inherited accounts of individuals who died before 2020 are unaffected by this change.
In addition to the RMD suspension mentioned above, the CARES Act includes some additional retirement-related changes effective in 2020.
- The 10% penalty on early distributions from retirement accounts is waived for up to $100,000 of coronavirus-related payouts. Such a distribution may also be included in income in equal installments over a three-year period. To take advantage of this feature, Form 8915-E needs to be attached to the 2020 tax return. In addition, the taxpayer has three years to put the money back into the retirement account and undo the tax consequences of the distribution.
- The CARES Act allows eligible individuals to borrow up to the lesser of $100,000 or 100% of a workplace retirement plan until September 23, 2020. Repayments on retirement plan loans due in 2020 are also delayed for one year.
Dollar limit thresholds have also been revised as follows:
- The maximum 401k, 403b and 457 contribution limits increased by $500 pa in 2020 to $19,500. Catch-up contributions for those born before 1971 also increase by $500 to $6,500
- Simple IRA contribution limits also increase by $500 to $13,500, plus $3,000 catch-up contribution those 50 and over.
- The 2020 contribution limit for traditional and Roth IRAs remain at $6,000, plus $1,000 as an additional catch-up contribution for individuals 50 and over.
- The income ceilings on Roth IRAs increased. Contributions phaseout in 2020 between AGIs of $196,000 to $206,000 ($193,000 to $203,000 in 2019) for those married-filing-jointly and $124,000 to $139,000 ($122,000 to $137,000 in 2019) for single filers.
- The 2020 deduction phaseout for traditional IRAs is between AGIs of $104,000 to $124,000 ($103,000 to $123,000 in 2019) for those married-filing-jointly and $65,000 to $75,000 ($64,000 to $74,000 for 2019) for single filers. If only one spouse is covered by a plan, the 2020 phaseout for deducting a contribution for the uncovered spouse is between AGIs of $196,000 and $206,000 ($193,000 and $203,000 in 2019).
More donations to charity can be deducted for 2020 under the CARES Act.
- The 60%-of-AGI limit on deductions for cashdonations by taxpayers who itemize is suspended (gifts to donor-advised funds and private nonoperating foundations are excluded). The relief applies only to 2020 charitable cash contributions Carryovers of excess charitable contributions from prior years are still subject to the 60% limit.
- Non-itemizing taxpayers can also write off up to $300 of charitable cash contributions. This is a new above-the-line deduction for 2020 only and applies only for taxpayers who do not itemize. The deduction is per return so those married-filing-jointly can only deduct $300, However it expected the latest stimulus package may increase this to $600 for those filing married-filing-jointly.
The Families First Coronavirus Response Act includes tax relief for self-employed people who cannot work because of the coronavirus compelling many employers to provide paid sick and family leave for employees impacted by the virus. However, tax credits against the self-employment tax are also allowed for self-employed taxpayers unable to work for a reason that would entitle them to coronavirus-related sick or family leave if he or she were an employee. Guidance on computation of the credit can be found on the IRS website:
- The CARES Act allows employers to pay down up to $5,250 in employees’ college loans in 2020. The payments are excluded from wages for federal tax purposes. This payment may apply to both student loan repayment and other educational assistance.
- The 2017 tax reform of the kiddie tax has been repealed effective 2020. Children age 18 or younger (under 24 if a student) with unearned income more than $2,200 will now be taxed at the higher of their own or their parents’ rate. The repealed tax law changed the rules to tax unearned income at the ordinary income rates and capital gains rates that apply for trusts. This resulted in higher tax for many filers, including military families with survivor benefits.
- The 2020 Social Security annual wage base is $137,700 for 2020, an increase of $4,800 from 2019).
- In August 2020, President Trump issued an executive memorandum allowing employers the option to suspend the collection and payment of Social Security payroll taxes from September 1 until the end of the year for employees making less than $4,000 for any bi-weekly pay period. If an employer elected to do this in 2020, they will be withholding the deferred taxes between January 1 to April 30, 2021 and their employees will have twice as much withheld for the 6.2% Social Security tax.
- The 2020 threshold for deducting medical expenses on Schedule A is 7.5% of AGI. The adjusted-gross-income threshold was due to increase from 7.5% to 10% after 2018, but the 2019 government funding law revived the 7.5% figure for 2019 and 2020.
- The CARES Act suspended the limit for deducting business losses on individual returns. Under the 2017 tax reform law, the amount of trade or business losses are limited to $500,000 for joint filers and $250,000 for other filers, with any excess carried forward. The CARES Act suspends this loss limitation rule generally for 2018 through 2020.
- The fine for filing late returns is higher for returns with post-2019 due dates. The minimum penalty for returns filed 60 or more days after the due date is now the lesser of $435 (up from $215) or 100% of the required tax shown on the return.