10 tips for filing your 2020 tax returns for individuals-things to keep in mind

Home office tax deductions and stimulus check taxes

Since late March, millions of employees made the shift from commuting to an office to working remotely from home this year because of the Coronavirus health crisis. Nonetheless, this remote work shift will not affect or change the Federal taxes deductions for most tax filers. Here are some of the reasons: 

• If you work for a corporation, you cannot claim a Federal deduction for your home office or home office expense unless you are a self-employed business owner.  

• If you are a self-employed business owner, your home office must be dedicated solely for work for the whole year to claim as a federal tax deduction. The space can’t double as anything else.
• Also keep in mind, that there are several states that allow state income tax deductions for unreimbursed employee business expenses. Consult with your local tax advisor, or, contact us for a complimentary consultation for your particular situation. 

Keep in mind, there are no taxes owed on the stimulus check direct payments that over 150 million Americans received as part of the CARES Act. Those individuals who were eligible but didn’t receive a payment in 2020 may claim it as a credit on their federal tax returns.

2020 tax deductions and other rules

Here is a list of things you need to know about all the Covid-19 pandemic related tax changes and other recent legislative updates. 

1. Retirement plans and withdrawal penalties

As part of the CARES Act, the legislation enacted on March 27, 2020, provided expanded distribution options and enabled temporary withdrawals, and retirement plan loan limits on traditional individual accounts (IRA) and Roth IRAs. Here is what you should be aware of if you took advantage of these relief options. 

• Repayment of coronavirus-related distributions: The CARES Act allowed penalty-free, coronavirus-related distributions up to $100,000 between January 1 and December 31, 2020, if allowed by the plan. Repayment of these are permitted within three years of taking the distribution, and taxation can be spread over a three-year taxation period.
• Loan repayments: Plan loan limits for qualified participants were temporarily increased to the lesser of $100,000 or 100% of the participant’s vested balance, if adopted by the plan. Qualified individuals could also delay certain loan repayments due in 2020, with subsequent payments adjusted to account for the delay and additional accrued interest.

Important to note: Now if you repay the loan from your 401(K) account according to its terms there are no additional taxes owed. But if you have lost your job, then the outstanding loan balance is usually due in full when you leave, and any remaining balance and accrued interest that isn’t paid off may be subject to additional taxes and penalties. 

2. Standard 2020 tax deductions

The Tax Cuts and Jobs Act of 2017 (TCJA act) nearly doubled the standard deduction. These amounts are now $12,550 for single filers, $18,800 for head-of-household filers, and $25,100 for married couples filing jointly.

3. Changes in this year’s tax withholdings

The IRS actually suggests that it is a smart idea to check your tax withholdings each year or especially in a year when a big life event happens. So this dumpster fire of a year, when many people may have lost jobs or income due to the Covid-19 pandemic lockdowns and recession. So if you started a side hustle business, got a second job, changed jobs or your spouse had a job change this year, you might want to take a second look at your tax withholdings, which can have an impact on your tax refund or taxes owed.  And after you have analyzed your withholding, it might be helpful to re-evaluate your retirement contributions.  A recent article in CNBC, states that only about 1 in 4 Americans has updated their withholding since the release of the new W-4, according to a recent survey from the American Institute of Certified Public Accountants. What’s more, nearly half (45%) of Americans can’t remember the last time they updated their withholding, while nearly 2 in 5 (37%) admit they’re unfamiliar with the W-4 altogether.

4. Elimination of personal exemptions

You used to be able to claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents to lower your taxable income. This exemption was eliminated in the 2017 tax bill in favor of increasing the standard deduction. (Refer to No. 2 section above.)

5. State and local tax deduction limitations

Assuming you itemize deductions, you are now limited to taking a $10,000 maximum deduction—$5,000 if married filing separately (MFS)—on any combination of state and local income, real estate, and personal property taxes. Alternatively, you may elect to substitute state and local sales taxes for income taxes, but you can’t use both.

6. Mortgage interest deduction limit

The TCJA tax reform law set a cap on the total amount of mortgage debt for which you can deduct any mortgage interest paid: up to $750,000 ($375,000 if MFS) if you take out a new loan for a first or second home between December 15, 2017, and December 31, 2025. If the tax act isn’t extended, the cap will revert to total mortgage debt of $1,000,000 ($500,000 if married filing single).   

Now if you already have a mortgage on a home, then your debt is grandfathered in, and you can refinance the loan without worrying about losing the $1,000,000 cap, if you don’t increase the debt by refinancing. Keep in mind, if you have a grandfathered mortgage loan, and you purchase a second home, the new cap will apply to limit the second home mortgage, to $750,000, less the grandfathered mortgage up to $750,000.

New mortgage interest deduction cap: Grandfathered mortgage + second home and/or purchase of a new home = $750,000

Another thing to note, Interest from home equity loans is no longer deductible, regardless of when you took out the loan.  

7. Exclusion for sale of your primary home

Now, many people moved this year away from cities to the suburbs, during the pandemic, and if you had decided to move and sell your primary residence, and you have lived there for two of the last five years, single filers can still exclude up to $250,000 (married couples up to $500,000) from capital gains taxes (which is a tax levied on profits you make when you sell for a price higher than what you originally paid, plus the cost of upgrades other than simple maintenance and repairs).

8. Child tax credit (CTC)

The child tax credit doubled to $2,000 per child until age 17. For lower income tax filers, up to $1,400 of this credit is refundable in cash per child.  

The child tax credit is now available to more households. The CTC is also available to more households. You can claim the full CTC if your adjusted gross income (AGI) is $200,000 or less for single parents, and $400,000 AGI or less for married couples. You can also take a $500 credit if you support a dependent who is not a child (e.g., elderly parent who depends on you for care, an adult child with a disability).

9. Alternative minimum tax (AMT)

According to the Tax Foundation, The Alternative Minimum Tax (AMT) was originally created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.

Now the 2017 TCJA Act tax reform law kept the AMT but reduced the number of people impacted by raising the income exemptions. For this year’s filing it’s $72,900 for a single or head of household, and $113,400 for married filing jointly or widow(er). 

10. Estate tax exemption

The amount of money exempt from the estate tax doubled.

For this year those numbers are $11.7 million for a single filer or $23.4 million for a married couple.8

Since only 0.2% of all estates are large enough to be hit by estate taxes, this only applies to a small number of affluent households and families. 

Conclusion 

To alleviate some of the aggravation and discomfort that comes with filing your taxes, start getting your tax-related forms and information pulled together in one spot. Also be sure to document any big life events that could impact your taxes—getting married, divorced, having a child, or buying a home—and have those documents handy, too. Huckabee CPA, of San Diego, California is a small business accounting  expert who can help you achieve your goals and forge forward along the path to success.   Have questions contact us for a free consultation.