There have been very few years in my life that I have looked forward to filing my taxes. Before college, I was a waitress and bartender, which resulted in me often owing taxes when filing because of how tips affect taxes. Now that I’m filing taxes as a small business owner for the second year, I dread the amount of work required to ensure everything is properly accounted for, categorized and supported for my taxes. (Yes, I filed an extension for that so I’m not done yet.) However, this year, I’m looking forward to hopefully a bigger return for some of the reasons detailed in this article. Here’s wishing you a nice return.
2020 was a nightmarish year for many families. But thanks to recent legislation, you could see a silver lining in the form of major tax breaks when filing your income taxes this spring. First up, although it’s technically not a tax break, the deadline for filing your 2020 federal income taxes has been pushed back from April 15 to May 17, 2021, which gave you an extra month to get your tax return handled.
The postponement applies to individual taxpayers, including those who pay self-employment taxes. But the extension does not apply to first-quarter 2021 estimated tax payments that many small business owners file. So if you file quarterly taxes, contact your tax advisor now if you haven’t already done so.
Additionally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 provides individual taxpayers with several hefty tax-saving opportunities, many of which are only available this year. What’s more, President Biden’s new relief package, known as the American Rescue Plan (ARP), which went into effect in March 2021, not only offers additional stimulus payments to most Americans, but it also includes significant tax relief for those taxpayers who lost their job and had to rely on unemployment benefits in 2020. Before we get into the meat and potatoes, it is important to note that SJN Law does not practice in tax law or provide tax advice. We work closely with CPA’s and other tax professionals and are happy to provide referrals as needed. While there are dozens of potential tax breaks available for 2020, here are 7 of the leading ways you can save big money on your 2020 tax return.
1. Stimulus Payments
As part of the CARES Act, millions of Americans received stimulus checks in 2020, and those payments were an advance refundable tax credit on your 2020 taxes. This means that no matter how much you owe (or get back) on your 2020 taxes, you get to keep all of the stimulus money and won’t have to pay any taxes on it.
Because the IRS didn’t have everyone’s 2020 tax returns when they issued the stimulus checks, they based the stimulus payments on your 2018 or 2019 returns, whichever one you had most recently filed. Using data from those years, the stimulus payments from 2020 phased out at an adjusted gross income (AGI) of $75,000 to $99,000 for singles and at $150,000 to $198,000 for married couples filing jointly. Given that the stimulus payments were based on your AGI for 2018 or 2019 but technically apply to your 2020 AGI, you may find that your payment was either too much or too little. But there’s good news—even if your financial situation has improved since 2018 or 2019 and you received too much stimulus money based on your 2020 income, you get to keep the overage.
By the same token, if you received too little or only partial payment on your 2020 stimulus, you can claim what you missed in the form of a recovery rebate credit when you file your 2020 taxes. Not sure how this would work? Here are three scenarios where you may be entitled to additional stimulus money.
● If your AGI for 2018/19 is higher than your AGI in 2020, you can claim the additional amount owed when you file your 2020 taxes this May.
● If you had a child in 2020, but didn’t get the $500 credit for dependent children in your stimulus payment, you can claim the child when you file your 2020 taxes.
● If someone else claimed the child based on 2018/19 returns, but you can legitimately claim that child on your 2020 return, you can get the $500 tax credit when you file in 2021, and the person who got it based on 2018/19 returns will not have to pay it back.
2. Unemployment Benefits
When the pandemic stalled out the economy, many Americans lost their jobs and were forced to rely on unemployment insurance to pay the bills. That said, unemployment benefits are generally taxable, so if you took them, without having taxes automatically deducted, you were looking at having to pay income taxes on that money when you file your 2020 return.
However, taxpayers who received unemployment benefits in 2020 were provided with significant relief with the passage of President Biden’s American Rescue Plan (ARP). Under the ARP, the first $10,200 of your 2020 unemployment benefits are tax-free if your annual household income is less than $150,000. The ARP doesn’t provide a different threshold for single and joint filers, so both spouses are entitled to the $10,200 tax break, for a potential total of $20,400, if both spouses received the benefits. Note that if your unemployment benefits exceed $10,200 in 2020, you’ll need to report the excess as taxable income and pay taxes on the amount over the limit. And if your household income is over $150,000, you’ll need to pay taxes on all of your unemployment benefits just like you would before the passage of the ARP.
If you already filed your 2020 return and paid taxes on your unemployment benefits before the passage of the ARP made those benefits tax free, the IRS plans to automatically process your refund. This means you won’t have to tax any extra steps, such as filing an amended return, to secure the refund. The IRS will release further details on this issue in the coming weeks. 3. Waived RMDs
You are typically required to take an annual required minimum distribution (RMD) from your IRA, 401(k), or other tax-deferred retirement account starting in the year when you turn 72, but the CARES Act temporarily waived the RMD requirement for 2020. The waiver also applies if you reached age 70½ in 2019, but waited to take your first RMD until 2020, as allowed under the SECURE Act.
RMDs generally count as taxable income, so taking this waiver means that you may have lower taxable income in 2020 and therefore owe less income taxes for 2020.
However, there are a number of factors to consider, including the state of the market and your living expenses, when deciding whether or not to waive your RMDs. Given this, consult with us, as your Personal Family Lawyer®, or your tax professional before making your final decision.
4. New Rules for Early Withdrawals From Retirement Accounts
If your finances were seriously impacted by last year’s economic turmoil, you may have needed to withdraw funds from your retirement accounts to cover your expenses. And thanks to new rules under the CARES Act, you have more flexibility to make an emergency withdrawal from tax-deferred retirement accounts in 2020, without incurring the normal penalties.
Typically, permanent withdrawals from traditional IRAs or 401(k) accounts are taxed at ordinary income rates in the year the funds were taken out. And pulling out money before age 59 1/2 would also typically cost you a 10% penalty.
But thanks to the CARES Act, you can avoid the 10% penalty (if under 59 1/2) on up to $100,000 in pandemic-related distributions from your retirement account in 2020. You are also allowed to spread such distributions over three years to reduce the tax impact. Or better yet, you can opt to put this money back into your retirement account—also within three years—and avoid paying taxes on the money all together.
However, because early withdrawals can negatively impact your retirement savings down the road, if you are looking to take advantage of this provision, you should consult with us, as your Personal Family Lawyer®, and your financial advisor first. Also, note that employers are not required to participate in this provision of the CARES Act, so you’ll also need to check with your plan administrator to see if it’s available at your workplace.
5. Medical Deductions
If you had hefty medical bills in 2020, you might be able to get some tax relief using increased deductions. Under the CARES Act, you can deduct any medical expenses above 7.5% of your adjusted gross income (AGI). Your AGI is your total income minus any other deductions you’ve already taken. For example, if your AGI was $100,000, you can deduct qualified unreimbursed medical expenses that exceeded $7,500 in 2020. However, you have to itemize your deductions in order to write off these expenses, so meet your tax professional to determine if this would make sense for your situation.
6. Earned Income Tax Credit
The Earned Income Tax Credit (EIC) is a refundable tax credit for low- and middle-income taxpayers that’s often overlooked. The amount of credit you can claim depends on your annual income and the number of kids you have—but people without kids can qualify, too.
Below are the maximum EIC amounts for 2020, along with the maximum income you can earn before losing the credit altogether. Note: You can't claim the EIC if you are a married individual filing separately.
Additionally, for the 2020 tax year, there are special rules for the EIC due to the pandemic: You can use either your 2019 income or your 2020 income to calculate your EIC and use whichever number gets you the bigger credit. This doesn’t happen automatically, though, so be sure to ask your tax professional to run the numbers both ways and choose the option that offers the most savings.
7. Child Tax Credit
If you have minor children aged 16 or younger, the Child Tax Credit is one of the most effective ways to reduce your federal income tax bill—and there are special rules for 2020 that can save you even more. For your 2020 taxes, you can claim up to $2,000 per qualified child as a tax credit, and under rules due to the pandemic, you can use either your 2019 income or your 2020 income to calculate your credit—whichever year offers the most savings. The credit begins to phase out when your AGI reaches $75,000 for single filers, $150,000 for joint filers, and $112,500 for head of household filers.
What’s more, with the passage of Biden’s new ARP this March, the child tax credit is set to get even bigger in 2021. When you file your taxes next year, the per child credit will go up to $3,000 or $3,600, depending on your child’s age. Look for a future blog post detailing all of the new tax saving opportunities available under the ARP for 2021 and beyond.
Maximize Your Tax Savings for 2020
These are just a few of the numerous tax breaks available for 2020. Indeed, there are plenty of other deductions and credits that might be up for grabs depending on your situation. Meet with your tax professional to make sure you don’t miss out on a single one. Contact us today for a referral if you don’t already have a tax professional. And hey, if you don’t already have your estate planning finished or it needs to be updated, now can be a great time to do it because you’re already having to dig into your financial records.
To learn more about our one-of-a-kind systems and services, contact our office to schedule a free personal Whole Family Life & Legacy Class or a Life & Legacy Planning Session™ today.
This article is a service of Sarah J. Nowels, Personal Family Lawyer®. At SJN Law, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office at (714)692-1738, texting Sarah at (949) 498-2203 emailing Sarah at firstname.lastname@example.org today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge and have your $750 deposit refunded or credited to your plan. We also pride ourselves on our continued service in seeking justice on behalf of employees whose civil rights have been violated. While we only take a couple of these cases at a time to maintian a high quality of service to our clients, if we can't help you, we will do what we can to provide you with guidance.