Tax Changes and Key Amounts for the 2020 Tax Year
1. Recovery Rebates:
Under Coronavirus Aid, Relief, and Economic Security (CARES) Act, most Americans will receive direct economic recovery rebate payments of $1,200 ($2,400 for couple filing jointly), plus $500 more for each child under age 17. The payments will start to phase 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
Technically, the rebate is an advance payment of a special 2020 tax credit. You will reconcile your rebate on your 2020 return. For most people, the rebate will equal the tax credit allowed. Taxpayers whose credits exceed their rebates can claim the balance on their 2020 returns. We expect you will not have to repay the IRS if the payment you got is more than your credit.
2. Retirement Plans:
There are a lot of changes in 2020 for retirement plans. Most of the changes come from the SECURE Act, which was signed into law late in 2019. However, the CARES Act includes a few provisions affecting retirement accounts, too.
Both acts significantly impact required minimum distributions (RMDs). For example, under the SECURE Act, the beginning age for taking RMDs 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. In addition, folks having a baby or adopting a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay the 10% ne for pre-age-59½ withdrawals.
Beginning in 2020, fellowships, stipends, or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA contributions, too. This will help qualifying students begin saving for retirement sooner, since contributions to a retirement account generally cannot exceed the amount of your compensation.
The rules for withdrawing money from inherited IRAs and workplace retirement accounts are also tightened by the SECURE Act—many accounts now need to be cleaned out 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 aren’t affected by this change.)
In addition to the RMD suspension mentioned above, the CARES Act includes a few other key retirement-related tax breaks for 2020. First, it waives the 10% penalty on pre-age-59½ payouts from retirement accounts for up to $100,000 of coronavirus-related payouts. A coronavirus-related distribution can also be included in income in equal installments over a three-year period, and you have three years to put the money back into your retirement account and undo the tax consequences of the distribution. Second, it allows eligible individuals to borrow more from workplace plans such as 401(k)s—up to the lesser of $100,000 or 100% of the account balance—until September 23, 2020. Repayments on retirement plan loans due in 2020 are also delayed for one year.
3. Tax Brackets:
Although the tax rates did not change, the income tax brackets for 2020 are slightly wider than for last year. 2020 Tax Brackets for Single/Married Filing Jointly/Head of Household:
|Tax Rate||Taxable Income (Single)||Taxable Income (Married Filing Jointly)||Taxable Income (HOH)|
|10%||Up to $9,875||Up to $19,750||Up to $14,100|
|12%||$9,876 to $40,125||$19,751 to $80,250||$14,101 to $53,700|
|22%||$40,126 to $85,525||$80,251 to $171,050||$53,701 to $85,500|
|24%||$85,526 to $163,300||$171,051 to $326,600||$85,501 to $163,300|
|32%||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350|
|35%||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $518,400|
|37%||Over $518,400||Over $622,050||Over $518,400|
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 on single returns ($39,375 for 2019), $53,600 for head-of-household filers ($52,750 for 2019) and $80,000 for joint returns ($78,750 for 2019).
The 3.8% surtax on net investment income stays the same for 2020. It kicks in for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.
4. Charitable Gift Deductions
More donations to charity can be deducted for 2020 under the CARES Act. The 60%-of-AGI limit on deductions for cash donations by people who itemize is suspended (gifts to donor-advised funds and private nonoperating foundations are excluded).
Nonitemizers can also write off up to $300 of charitable cash contributions. This is a new “above-the-line” deduction for people who don’t file Schedule A.
5. Estate Taxes
The lifetime estate and gift tax exemption for 2020 jumps from $11.4 million to $11.58 million—$23.16 million for couples ($22.8 million for 2019) if portability is elected by timely ling Form 706 after the death of the first-to-die spouse. The estate tax rate remains steady at 40%.
6. Kiddie Tax
The 2017 tax reform law’s revamp of the “kiddie tax” has been repealed. Prior to 2018, children age 18 or younger (under 24 if a student) were taxed on unearned income in excess of a certain amount at their tax rate or their parents’ rate, whichever was higher. The tax reform 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. So Congress repealed the kiddie tax change, and the pre-2018 rules apply again for 2020. (Taxpayers can elect to apply the pre-2018 rules to 2018 and 2019 returns as well.)
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 must be redeemed to help pay for tuition and fees for college, graduate school or vocational school for the taxpayer, spouse or dependent.
There are two expansions to 529 college savings plans starting in 2020, too. First, 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. Energy Credits
The residential solar credit falls to 26% for 2020, which is down from 30% in 2019. It drops again to 22% next year and ends after 2021. Ditto for the tax breaks for geothermal heat pumps, residential wind turbines and fuel cell property.
9. Medical Expenses
The 2020 threshold for deducting medical expenses on Schedule A is 7.5% of AGI. The adjusted-gross-income threshold was slated to jump from 7.5% to 10% after 2018, but the 2019 government funding law revived the 7.5% figure for 2019 and 2020. The limits on deducting long-term-care premiums are higher in 2020. Taxpayers who are age 71 or older can write off as much as $5,430 per person ($5,270 for 2019). Filers age 61 to 70 can deduct up to $4,350 ($4,220 for 2019). Anyone who is 51 to 60 can deduct up to $1,630 ($1,580 for 2019). For people age 41 to 50, the max is $810 ($790 for 2019). Finally, for whippersnappers age 40 and younger, it’s $430 ($420 for 2019). For most, long-term-care premiums are medical expenses deductible only by itemizers on Schedule A. However, self-employed people can deduct them on Schedule 1 of the 1040.
10. Alternative Minimum Tax (AMT)
There’s good news for anyone worried about getting hit with the alternative minimum tax: AMT exemptions tick upward for 2020. They increase to from $111,700 to $113,400 for couples and from $71,700 to $72,900 for single lers and heads of household. 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 28% AMT tax rate kicks in a bit higher in 2020—above $197,900 of alternative minimum taxable income. The rate applied to AMTI over $194,800 for 2019.