As tax season moves into full swing, we have several important reminders for taxpayers who are about to file their 2020 federal tax returns. 2020 was a year with many changes and challenges. While we did not see any major pieces of tax legislation passed, there were several temporary adjustments to the tax code in the form of tax relief. As such, the IRS has recently extended the 2020 Federal tax filing deadline to May 17th. For good measure, we highly recommend exploring your own state’s tax relief measures, especially those that regularly decouple from Federal tax law changes and choose not to extend their filing deadline.

Possibility of further tax relief

It is possible we may see further last-minute changes to the tax code, like we did with unemployment benefits in the most recent stimulus package. It may be in your best interest to take your time filing this year in, case there is further tax relief. Of course, deciding to wait entirely depends on your personal financial and tax situation.

Reconcile stimulus payments

The federal government distributed two stimulus payments to eligible individuals and families during 2020, known as Economic Impact Payments. The CARES Act, passed in March, provided up to $1,200 per qualifying individual and $500 for each dependent under 17. The Consolidated Appropriations Act also provided $600 payments for most individuals. Contrary to a common misconception, the payments are “advanced tax credits,” known as Recovery Rebate Credits, and are not taxable income. Therefore, individuals who did not receive the full amount or any direct payments are advised to file a 2020 tax return to claim the credit equal to the rebate you are entitled to receive.

Suspended Required Minimum Distributions (RMDs) returned

The CARES Act waived RMDs for 2020 for IRA owners, including beneficiaries with inherited IRAs, and retirement plan participates. Because the CARES Act passed in March, many individuals had already withdrawn their yearly required distribution. Therefore, the IRS gave everyone until August 31, 2020 to return or “rollover” their RMD to their retirement account and waived the once-a-year rollover rule. If this happened to you, you should receive a Form 1099-R showing the original payout, which you will record on your Form 1040, however, you can then subtract the amount and report it as a “Rollover”, thereby ensuring it is not included in your taxable income.

$300 charitable deduction for those who do not itemize

The CARES Act also established a new, but temporary, above-the-line deduction for charitable donations up to $300 in cash. The Tax Cuts and Jobs Act, passed in 2017, significantly reduced the number of taxpayers who itemize deductions on their tax returns and choose to take the standard deduction instead. Therefore, this temporary change allows many people who take a standard deduction to also receive a tax benefit for their charitable giving.

Save for retirement (and health care expenses) by maxing out your IRA, Roth IRA, HSA, etc.

You still have time to fund your retirement and health savings accounts (HSAs) before the tax filing deadline of May 17th. For those with Keogh or SEP accounts, you also have until May 17th, however, if you file an extension to October 15, 2021, you have until then to make a contribution. As long as you have enough earned income, most people qualify to make IRA or Roth IRA contributions, however the tax deductibility is not guaranteed. For 2020, the maximum contribution per person for each account type are:

• Traditional or Roth IRA: $6,000 ($7,000 if you are age 50 or older by the end of 2020)
• SIMPLE IRA: $13,000 ($16,000 if you are age 50 or older by the end of 2020)
• Health Savings Account (HSA): $3,550 for a ‘single’ high deductible health plan and $7,100 for a ‘family’ high deductible health plan
• Keogh or SEP-IRA: $57,000 for 2020

Covid-19 related 401(k) distributions

The CARES Act allowed individuals to withdraw eligible funds from their retirement accounts for coronavirus-related expenses without incurring a 10% early withdrawal penalty (before age 59 ½). However, taxes are due on the distributions and included in taxable income. Individuals have the option to repay the distribution, putting money back into their retirement accounts, over a three-year period, and pay income taxes over three years (one-third each year). Another option, if elected, is to pay all the taxes in the year the distribution was taken.

Report unemployment benefits

Taxpayers who received unemployment benefits in 2020 must report the amount received as taxable income on their tax return. However, within the recent stimulus package, the American Rescue Plan Act, a provision waives taxes on the first $10,200 of unemployment insurance benefits per individual for those who made less than $150,000 in adjusted gross income in 2020, regardless of filing status. The IRS has stated they will issue refunds for those who have already filed their 2020 tax returns, so there is no need to file an amended return and they are working closing with the tax software companies on updating their systems and programs.

Paycheck Protection Program

If you received a loan through the Small Business Association’s Paycheck Protection Program and it was subsequently forgiven, the loan amount can be excluded from gross income. However, taxpayers and small business owners should be aware that, as the rule currently stands, the IRS has determined that those who had their loans forgiven cannot deduct expenses paid with the loan.

Home office deduction?

With many more people working from home due to the pandemic, you may be wondering if you qualify for the home office deduction. Unfortunately, recent legislation has not changed the qualifications to take the deduction, so you need to have self-employment income to qualify. Therefore, if you are a full-time W-2 employee, you are currently not eligible.

File a gift tax return

If you made gifts in excess of $15,000 per recipient (the annual exclusion amount) in 2020, you must file Form 709 by April 15, 2021, this has not been included in the extension. Certain gifts, such as “future interests” and “partial interest” donations to charity also require an individual to file a gift tax return. However, even if your gifts exceed the annual exclusion amount, tax is not owed unless gifts exceed the lifetime gift tax exemption of $11.58 million in 2020.

Watch for corrected 1099s

It is common for companies and funds to modify their tax reporting after the end of the year. If this occurs, they will provide updated tax information to the custodian or recordkeeper, who will then prepare and provide a corrected 1099 to you. An easy way to tell if you received incomplete information from a custodian is by looking for the words “Not Provided” on any of the lines of the tax document. Therefore, you will likely receive a “Corrected” 1099 before you are required to file so waiting to file your taxes closer to the May 17th deadline will reduce the risk of having to file an amended return.

Reevaluate paycheck withholdings and tweak tax payments for 2021

Tax filing and planning should be viewed as a continuous process, not just something you do once a year. If you received an unusually large refund or, even worse, owed a significant balance, be sure to adjust the withholding from each paycheck. The IRS provides a withholding calculator for those who need further assistance or anticipate significant changes in your personal life over the next year.

Make protecting tax and financial information a habit

To protect yourself from identity theft and scams, it is critical to practice information security, especially when the IRS is involved. Remember the IRS does not initiate contact with taxpayers by email, text messages or social media channels to request information. In general, the IRS will initiate contact through mail or possibly a phone call. Therefore, to minimize your exposure to fraudsters or identify thieves, be sure to safeguard your personal data with strong passwords, encryption, 2-factor authentication, and maintaining up-to-date software and devices.

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Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.