Tax Changes and Key Amounts for the 2020 Tax Year
Americans are facing a long list of tax changes for the 2020 tax year. Get familiar with them now so you're ready when it's time to file your 2020 tax return.
We were expecting 2020 to be a quiet year in terms of tax law changes. But, boy, were we ever wrong! The government funding bills signed by President Trump in December 2019 included a lot of tax provisions. The economic stimulus packages enacted in March 2020 to help boost the U.S. economy dragged down by the coronavirus added more. Plus, there are several other 2020 tweaks from new rules or annual inflation adjustments. All in all, this means American taxpayers are staring at a long list of tax changes for the 2020 tax year.
If the past is any indication, the IRS should start accepting 2020 returns in late January or maybe early February. But now's the time to start getting ready for tax filing season. And getting familiar with all the new tax laws for 2020 should be part of that process. To help you out, we pulled together a list of the most important tax law changes and adjustments for 2020 (some related items are grouped together). Use this information now so you can save money when it comes time to file your 2020 return.
Recovery Rebate Credits
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. (To see how much you should have received, use our Stimulus Check Calculator.)
Technically, your stimulus check was an advance payment of a special 2020 tax credit known as the recovery rebate credit. When you file your 2020 return, you'll have to reconcile the stimulus check you received with the recovery rebate credit you're entitled to claim. For most people, the stimulus check payment will equal the tax credit allowed. In that case, your credit will be reduced to zero. However, if your stimulus check was less than your credit amount, the tax you owe will be reduced by the difference (and you might even receive a refund). And if your stimulus check was more than your credit amount, you generally won't have to repay the difference to the IRS. (Also note that the stimulus check payments are not taxable!)
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% fine 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 can't 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. If you've taken advantage of this coronavirus-related easing, you must attach Form 8915-E to your return to spread out the tax on the distributions. Second, the CARES Act allowed 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.
Many key dollar limits on retirement plans and IRAs are higher in 2020, too. The maximum 401(k) contribution for 2020 is $19,500, but those born before 1971 can put in $6,500 more (both amounts are $500 higher than in 2019). The caps apply to 403(b) and 457 plans as well. This year's cap on contributions to SIMPLE IRAs is $13,500 ($500 more than last year), plus $3,000 extra for people age 50 and up.
The 2020 contribution limit for traditional IRAs and Roth IRAs stays steady at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up. However, the income ceilings on Roth IRA contributions went up. Contributions phase out in 2020 at adjusted gross incomes (AGIs) of $196,000 to $206,000 for couples and $124,000 to $139,000 for singles (up from $193,000 to $203,000 and $122,000 to $137,000, respectively, for 2019).
Deduction phaseouts for traditional IRAs also start at higher levels in 2020, from AGIs of $104,000 to $124,000 for couples and $65,000 to $75,000 for single filers (up from $103,000 to $123,000 and $64,000 to $74,000 for 2019). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $196,000 of AGI and ends at $206,000 (they were $193,000 and $203,000 for 2019).
If you haven't maxed out your contributions for 2020, think about contributing all or a portion of a year-end bonus to your 401(k) before December 31 to save on taxes. You also have until April 15, 2021, to make a 2020 contribution to a traditional IRA or a Roth IRA.
Tax Bracket Ranges
Although the tax rates didn't change, the income tax brackets for 2020 are slightly wider than for last year. The difference is due to inflation during the 12-month period from September 2018 to August 2019, which is used to figure the adjustments.
2020 Tax Brackets for Single/Married Filing Jointly/Head of Household
| Tax Rate | Taxable Income (Single) | Taxable Income (Married Filing Jointly) | Taxable Income (Head of Household) |
|---|---|---|---|
| 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 |
Standard Deductions
Many of the standard deduction amounts were increased for 2020. Married couples get $24,800 ($24,400 for 2019), plus $1,300 for each spouse age 65 or older. Singles can claim a $12,400 standard deduction ($12,200 for 2019)—$14,050 if they're at least 65 ($13,850 for 2019). Head-of-household filers get $18,650 for their standard deduction ($18,350 for 2019), plus an additional $1,650 once they reach age 65. Blind people can tack on an extra $1,300 to their standard deduction ($1,650 if they're unmarried and not a surviving spouse).
Capital Gain Rates
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 20% rate for 2020 starts at $441,451 for singles ($434,550 for 2019), $469,051 for heads of household ($461,700 for 2019) and $496,601 for couples filing jointly ($488,850 for 2019).
The 15% rate is for filers with taxable incomes between the 0% and 20% break points.
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.
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). The relief applies only to charitable cash contributions that you make this year and deduct on the Schedule A that you file in 2021. Carryovers of excess charitable contributions from prior years don't get the break.
Nonitemizers can also write off up to $300 of charitable cash contributions. This is a new "above-the-line" deduction for 2020 only. It also applies only for people who don't file Schedule A. This write-off is per return, meaning married couples who file jointly can only deduct $300, not $600.
Tax "Extenders"
A number of expired or expiring tax breaks were revived late last year—most through 2020. They include deductions for mortgage insurance premiums and college tuition, as well as the $2-million exclusion for forgiven mortgage debt and the credit for certain energy-saving improvements to your home.
These tax breaks apply for 2018 and 2019 as well. So, if you qualified for any of them in those years, it might be worth filing an amended return and claiming a refund. (Amended returns can now be filed electronically.)
Also note that these extenders expire again after 2020 unless Congress decides to extend them for another year or so, which is a definite possibility.
Sick and Family Leave Credits for Self-Employed
The Families First Coronavirus Response Act includes tax relief for self-employed people who can't work because of the coronavirus. The law forces many employers to provide paid sick and family leave for workers affected by the virus. However, tax credits against the self-employment tax are also allowed for self-employed people who can't work for a reason that would entitle them to coronavirus-related sick or family leave if he or she were an employee. (Employers also get tax credits to help them pay for the paid leave they are required to give their employees.)
For more information on these tax credits, see Tax Credits Included in Coronavirus Paid Leave Law.
Student Loan Payments by Employers
The CARES Act allows employers to pay down up to $5,250 in workers' college loans in 2020. The payments are excluded from the workers' wages for federal tax purposes. The $5,250 cap applies to both student loan repayment benefits and other educational assistance (e.g., tuition, fees, books, etc.) offered by an employer under current law.
Adoption of a Child
For 2020, the adoption credit can be taken on up to $14,300 of qualified expenses ($14,080 for 2019). The full credit is available for a special-needs adoption, even if it costs less. The credit begins to phase out for filers with modified AGIs over $214,520 and disappears at $254,520 ($211,160 and $251,160, respectively, for 2019).
The exclusion for company-paid adoption aid was also increased from $14,080 to $14,300 for 2020.
Estate & Gift Taxes
The lifetime estate and gift tax exemption for 2020 jumped from $11.4 million to $11.58 million—$23.16 million for couples if portability is elected by timely filing Form 706 after the death of the first-to-die spouse. The estate tax rate remains steady at 40%.
The gift tax exclusion remains $15,000 per recipient. You can give up to $15,000 ($30,000 if your spouse agrees) to each child, grandchild or any other person in 2020 without having to file a gift tax return or tap your lifetime estate and gift tax exemption.
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.)
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.
Employee Fringe Benefits
U.S. taxpayers working abroad have a larger income exclusion in 2020. It jumped from $105,900 in for 2019 to $107,600 this year. (Taxpayers claim the foreign earned income exclusion on Form 2555.)
The cap on employer-provided tax-free parking goes up from $265 to $270 a month. The 2020 exclusion for mass transit passes and commuter vans is the same amount.
Employees covered by health flexible savings plans can defer up to $2,750 in 2020. That's up from $2,700 in 2019.
Energy Credits
The residential solar credit falls to 26% for 2020, which is down from 30% in 2019. It drops again to 22% in 2021 and ends after that. Ditto for the tax breaks for geothermal heat pumps, residential wind turbines and fuel cell property.
Payroll Taxes
The Social Security annual wage base is $137,700 for 2020 (that's a $4,800 hike from last year). The Social Security tax rate on employers and employees stays pat at 6.2%. Both workers and employers continued to pay the 1.45% Medicare tax on all compensation in 2020, with no cap. Workers must also pay the 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn't hit employers, though.
(NOTE: The CARES Act lets employers defer payment of the Social Security taxes they owe on wages paid from March 27 through December 31, 2020. Self-employed people can defer 50% of their self-employment tax. Employers affected by the coronavirus can also claim a new payroll tax credit for 2020 if they retain and continue to pay their workers. For more information, see 7 CARES Act Tax Breaks for Businesses.)
In August 2020, President Trump issued an executive memorandum allowing employers to suspend the collection and payment of Social Security payroll taxes from September 1 until the end of the year for workers making less than $4,000 for any bi-weekly pay period (i.e., $2,000 per week, or $104,000 per year). The president's action didn't eliminate the tax debt—it just delayed withholding and payment of the tax—and it was optional. If your employer suspended payroll taxes in 2020, it will have to collect the deferred taxes from your paycheck from January 1 to April 30, 2021. So, during the first four months of 2021, you will have twice as much withheld from your paychecks for the 6.2% Social Security tax.
The nanny tax threshold goes up to $2,200 in 2020, which is a $100 increase from 2019.
There was also a revamped Form W-4 introduced in 2020. Since personal exemptions are zero until 2026, workers no longer claim withholding allowances on the W-4. Instead, the IRS revised the form to focus on items such as filing status, number of dependents, filers with multiple jobs, estimated tax breaks and other income you plan to report on your 1040. The IRS didn't require all employees to submit a new W-4 form for 2020 to their employer. Instead, only employees hired after 2019 and workers who want to adjust their post-2019 income tax withholding had to fill out the new form. However, it's a good idea for all workers to review their tax situations and figure out whether submitting a new W-4 to hike or decrease withholding makes sense for them.
Standard Mileage Rates
The 2020 standard mileage rate for business driving fell from 58¢ to 57.5¢ a mile. The mileage allowance for medical travel and military moves also declined from 20¢ to 17¢ a mile in 2020. However, the charitable driving rate stayed put at 14¢ a mile—it's fixed by law.
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.
HSAs, FSAs and HRAs
The annual cap on deductible contributions to health savings accounts (HSAs) rose in 2020 from $3,500 to $3,550 for self-only coverage and from $7,000 to $7,100 for family coverage. People born before 1966 can put in $1,000 more (same as last year).
Qualifying insurance policies must limit out-of-pocket costs in 2020 to $13,800 for family health plans ($13,500 in 2019) and $6,900 for people with individual coverage ($6,750 in 2019). Minimum policy deductibles increase this year from $2,700 to $2,800 for families and from $1,350 to $1,400 for individuals.
The IRS also announced that anyone with a high-deductible health plan that covers medical expenses related to COVID-19 before plan deductibles have been met can still contribute to an HSA. This includes coverage for the panel of diagnostic testing for influenza A and B, norovirus and other coronaviruses, and respiratory syncytial virus, and any items or services required by law to be covered with zero cost sharing. It also included telehealth and other remote care services.
In addition, beginning in 2020, funds from HSAs, health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs) can be used to buy over-the-counter medicines without the need of a doctor's prescription, as well as menstrual care products.
Workers could also make mid-year changes to their health and dependent care FSAs in 2020, if their employer modified its FSA plan. Employers could allow workers to:
- Sign-up or revoke an election to contribute to a health or dependent care FSA for 2020; or
- Increase or decrease the amount contributed in 2020 to a health or dependent care FSA.
Employers also have the option of upping the carryover amount for 2020 FSAs from $500 to $550. This didn't apply to amounts carried over from 2019 to 2020, though. In addition, the carryover amount will be adjusted for inflation going forward.
The IRS also let employers extend the FSA grace period to incur health or dependent care expenses for the previous year to the end of the year. Again, it was optional. So, for example, if an employer sponsored a 2019 FSA with a grace period ending on March 15, 2020, it could have amended its FSA plan to let workers apply unused 2019 FSA funds to pay for qualifying expenses incurred through December 31, 2020. Note, however, that a worker who had unused amounts from a 2019 health FSA and who is allowed an extension to the end of 2020 to incur expenses generally will not be allowed to contribute to an HSA during the extended period.
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 from $111,700 to $113,400 for couples and from $71,700 to $72,900 for single filers 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.
Deduction for Pass-Through Income
A key dollar threshold on the 20% deduction for pass-through income was increased for 2020. Self-employed people and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $326,600 for joint filers and $163,300 for others ($321,400 and $160,700, respectively, for 2019).
Business Losses for Self-Employed People
The CARES Act suspended the cap for deducting business losses on individual returns. Under the 2017 tax reform law, the amount of trade or business losses over $500,000 for joint filers and $250,000 for other filers is not deductible, with any excess carried forward. The CARES Act suspends this loss limitation rule generally for 2018 through 2020.
Interest on Tax Refunds
For those who received a federal tax refund in 2020, you may have also been paid interest. The IRS wants you to know that refund interest payments are taxable and must be reported on your federal income tax return. In January 2021, the IRS will send Form 1099-INT to anyone who received interest totaling $10 or more. Make sure you report it on your 2020 return.
Penalties
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.
