Tax Update

2020 Year End Newsletter

New Tax Laws in 2020

As you begin planning to file your 2020 tax return, here are some of the new tax laws passed over the last year that could affect you.

  1. Early distribution penalty waived. The 10% early distribution penalty on up to $100,000 of retirement withdrawals for coronavirus-related reasons is waived during 2020. New rules allow tax liabilities on these distributions to be paid over a three-year period.

  2. Required minimum distributions waived for 2020. Required minimum distributions in the year 2020 for various retirement plans is suspended. The corresponding 50% penalty associated with not taking a distribution is also suspended.

  3. Medical deduction threshold decreases. Qualified medical expenses that exceed 7.5% of your adjusted gross income may be used as an itemized deduction. The lower threshold (formerly 10%) is a carryover from a late 2019 tax law change.

  4. Mortgage forgiveness is not income. If a bank forgives mortgage indebtedness, it is typically income to you. Qualified principal residence indebtedness that is forgiven, however, may be excluded from income with the reactivation of this tax law.

  5. Mortgage insurance premium deductions. IF your mortgage bank requires insurance on your loan and the loan qualifies, you can deduct this premium as an itemized deduction.

  6. The tuition and fees deduction is available. The above-the-line deduction for up to $4,000 is qualified tuition and fees expenses that expired is still available in 2020. You will need to evaluate this tax break versus others like the American Opportunity Credit and Lifetime Learning Credit.

Other new tax laws for 2020:

  • Part-time workers can participate in 401(k) plans.

  • Leftover money in a 529 education plan can be used to pay off $10,000 of student loans.

  • New parents can withdraw $5,000 out of retirement funds without penalty to pay for the cost of a birth or adoption.

Income Brackets for 2020 Tax Rates

Be on the look out for New Form 1099-NEC

If you're self-employed, an  independent contractor or a freelancer, there's a big change coming thanks to the IRS. For almost 40 years, you've received a 1099-MISC  from  businesses to  which you  provided more than $600 in services. Starting with the 2020 tax filing season, you'll be receiving Form 1099-NEC instead.

                        

Here's  what you need to  know  about this change:                               

Form  1099-NEC  is used exclusively to report nonemployee compensation. Nonemployee compensation is any payment  you received from a business in exchange for your products and/or services.  Nonemployee compensation also includes fees, commissions, prizes and awards.                                              

Save More for  Retirement

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Retirement account rules are changing for 2020. Here are the major changes and some suggestions to help you take advantage of them.

                        

Contribute to a traditional IRA at any age.

While you have always been able to contribute to a Roth IRA at any age, 70 1/2 was the cut-off for making contributions to a traditional IRA. This age limit for traditional IRAs is now gone. If you have earned income, you and your spouse can now each contribute $6,000 to either a traditional or Roth IRA ($7,000 for those age 50 and over). Taking advantage: Consider getting a part-time job or do some consulting so you can earn up to $7,000 each year to contribute to your IRA. You can decide if you wish to contribute to either a Roth IRA or a traditional IRA depending on your situation.

More time before you MUST take money out.

You now have until age 72 before you are required to take minimum distributions from qualified retirement accounts. This is an increase from the old, complicated age 70 1/2 rule. Retirement savings that need to be reported as taxable income when withdrawn can now be left to grow for an additional 18 months before distributions are mandatory and your taxable income increases.

Taking advantage:

By efficiently planning your withdrawal amounts before age 72 you can often reduce the tax on these funds when withdrawn. So review the minimum distribution requirements of your IRAs, 401(k)s and other retirement savings accounts to develop a plan take advantage of this new rule.


Inherited retirement accounts require more planning.

Beginning in 2020, the MAXIMUM allowed distribution time frame from retirement accounts is limited to 10 years for newly-inherited IRAs. IRAs inherited before 2020 can still be withdrawn over a person's lifetime using old stretch IRA rules.


Taking advantage:

Estate planning just got a lot more important. First, know that the limited stretch rules DO NOT apply to surviving spouses, minor children up to age 18 (but not grandchildren), disabled individuals and individuals not more than 10 years younger than the IRA owner. Second, if you receive inherited funds, know that you often have a number of distribution options available to you. They include a lump sum distribution, a five-year distribution rule, rollover options and this new 10-year rule.

Key Retirement Plan Limits

New Charitable Contribution Tax Breaks in 2020

There are several new tax breaks for charitable donations in 2020. Here are three changes to help your favorite charity while receiving a tax break:

  • $300 charity deduction without itemizing. You can claim an above the line deduction of up to $300 for cash donations to qualified charities. In other words, you get a deduction whether you itemize or not.

  • Donate up to 100% of your income. You can donate as much of your 2020 income as you feel like giving. The annual deduction for monetary donations is normally limited to 60% of your income, but this has increased to 100% in 2020.

  • Businesses can contribute more! A business can give up to 25% of its taxable income, an increase from the normal threshold of 10%. Businesses also qualify for a special enhanced deduction for gifts of food from 15% of taxable income to 25%

Standard Deductions in 2020

Mileage Rates for 2020

Maximum Earned Income Tax Credit for 2020

Taxable of Not Taxable?

The tax code can cause confusion as to the taxability of money received. Here are some of the most confusing.


Unemployment compensation. Unemployment compensation is typically reported as taxable income. There are times when federal and state taxing authorities exempt unemployment income from taxation, so watch for possible legislation.

 

Exchanging services. Report the fair market value of services received as income on your tax return. If you exchange services, you can deduct allowable business expenses against the value of the services received.


Jury duty pay. This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.


Legal settlements. If the settlement replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and often requires a detailed review.


Life insurance proceeds. Life insurance proceeds paid to you because of the death of an insured are generally not taxable. There are, however, a number of exceptions to this general rule.

Prizes. Most prizes received should be reported as ordinary income using the fair market value of the item received.

 

Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it for pre-2019 divorces. Divorces after 2018, alimony is neither deductible by the person who paid it nor deemed additional income by the person receiving it.

 

Child support. Child support is not taxable to the person who receives it on behalf of a dependent. It is also not deductible for the person who pays it.

 

This publication provides summary information regarding the subject matter at time of printing. Please call with any questions on how this information may impact your situation.

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