2020 has been a tough year for the whole world. The pandemic has influenced various aspects of the economy that affected people of all financial backgrounds. US tax policies did not remain unaffected by the effect of the COVID-19 pandemic. Other than the coronavirus-related legislation, aspects like new standard deduction amounts, income thresholds for certain tax brackets also led to the major tax changes. Thus, as the tax year 2020 has concluded, let us look at those changes so that you do not face issues while filing your 2020 return now.
Important Federal Changes
- Qualified Improvement Property
A new technical correction has been made to depreciate the improvements made to buildings. This modification now allows a property to be depreciated over 15 years and makes it eligible for bonus depreciation. Bonus depreciation is a tax incentive with the help of which a business can deduct a huge part of the cost price of some assets like machinery.
- Changes to Net Operating Losses
Both Individuals and corporations are to be affected by the changed net operating loss. One can carry losses that occurred in 2018, 2019, or 2020 up to five years back. These losses can fully offset income in prior years.
- Changes to Business Interest Limitations
Before 31 December 2020, the interest deduction for businesses was 30%, but for the taxable income for 2019 and 2020, it has been increased to 50%. After 31 December 2020, it will again become 30%.
- Employee Retention Credit
Eligible employers can claim a refundable payroll tax credit worth 50% of qualified wages paid to employees from March 2020 to December 2020. The maximum amount of qualified wages for credit purposes for every employee is $10,000 for the tax year 2020. Hence, the maximum credit for qualified wages for each employee becomes $5,000.
The line related to Federal income tax withheld from Forms W-2 and 1099″ has now been divided into two distinct lines (lines 25(a)-(c)) for withholding for Forms W-2, 1099, and “other forms.
- Charitable Contribution Deduction Changes
If a taxpayer is claiming a Standard deduction, he/she can deduct up to $300 to adjust the income on their 2020 Federal return.
The deduction has to be claimed on the new line 10b on Form 1040. Irrespective of the filing status, the maximum deduction amount is $300 per return.
There is a suspension of the AGI limit of 60% for Cash Contribution for the tax year 2020. Another important change has been brought forth with the increase in corporate charitable contributions from 10% to 25% for 2020.
Changes related to the Individual Retirement Account Scheme
Once they reach the age of 70 ½, they can contribute to an IRA, if their bank allows it to happen. Additionally, the minimum distribution required by IRA has been suspended for only tax year 2020. Earlier it was when they reached age 70 ½.
The COVID-19 related distributions of up to $100,000 from qualified retirement accounts will not be subject to 10% penalty tax. The distribution will be taxable only if the taxpayer fails to re-contribute within 3 years.
What is the meaning of a coronavirus-related distribution?
A coronavirus-related distribution refers to a distribution made in 2020 to a qualified individual.
As per the definition of a qualified individual, such individual is the one
- who is diagnosed with COVID-19 in 2019 or
- whose spouse or dependent individual is diagnosed with COVID-19, or
- Who is experiencing adverse financial consequences due to various reasons like quarantine, being fired from work, reduced work hours, and any adverse condition directly or indirectly rooted in the spread of COVID-19?
If the taxpayer re-contributes the distribution within 3 years, the withdrawal will not be taxable.
Payment Extension/Deferral for Payroll Tax (Social Security Portion)
The above-stated change in the tax policy facilitates self-employed individuals and employers to delay paying 6.2% employer share of the Social Security tax between 27 March 2020 and 31 December 2020.
Any deferred tax has to be paid in the following 2 years. The other condition is that it should be half paid by the end of 2021, and the other half should get paid by the end of 2022.
For individuals, the same shall get calculated on Schedule SE (Self Employment Tax) or Schedule H. On Schedule SE, the calculation needs to be done in Part III.
A compensation for non-employees is reported on this form. It used to be previously reported on 1099-MISC. While you file your tax return in 2021, many states will require this form to be filed.
Health Insurance Mandate Penalty
If an individual has not obtained health insurance, they are not entitled to the penalty. The states of California, Massachusetts, New Jersey, Rhode Island, and Washington DC have a mandate with a penalty provision.
Virtual Currency Question
The question that was previously on the top of Schedule 1 has now been added on Form 1040, Page 1: This question enquires taxpayers whether or not at any point of time in the year 2020 did they receive, exchange, sell or even acquire a financial interest in any form of virtual currency.
Here, this question intends to help educate taxpayers on the tax consequences of engaging in virtual currency transactions.
If the money received (if any) as virtual currency is for compensation or services performed for someone, it has to be included in the individual’s taxable income.
Recovery Rebate Credit
The recovery rebate credit is refundable for taxpayers who did not receive the full economic impact payment in 2020.
The credit needs to be claimed on Line 30 on Form 1040. The rebate amount is based on various factors like the taxpayer’s 2020 income, the number of eligible children, filing status, and more. The calculated credit is also reconciled with the payment received in 2020 (if any).
Who is eligible to have refundable Recovery rebate credit?
Taxpayers fulfilling the following conditions will be eligible to get a refundable credit on their 2020 tax return:
- The taxpayer did not receive any economic stimulus payment at all
- Economic stimulus payment was limited based on their income in 2018 or 2019. And 2020 income was below the income limit
- The taxpayer did not receive payment for one or more of their eligible children
A majority of people received their full economic stimulus payment during 2020. Thus, their credit will be calculated as zero.
Credit for Sick Leave & Family Leave for certain self-employed individuals
The self-employed individuals who had to take leave from work because they were affected by COVID-19 or had to take care of somebody who was COVID-stricken can also claim their credit. The credit is known by the name “credit for sick leave and family leave.”
The credit is calculated on Form 7202 that the IRS introduced recently. The form is still in draft format—amount from the Form 7202 transfers to Form 1040, Schedule 3 Line 12b.
Give due consideration to every tax change to duly file your 2020 tax return!
All taxpayers must pay adequate attention to the various changes discussed above to ensure that their tax planning and return filing process reaches fruition. Hiring professional help can be a great choice for your firm.
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