December 2020 COVID-19 Relief Bill
In December 2020 Congress passed substantial tax legislation designed to further assist affected taxpayers of the Covid pandemic. Key provisions are;1) Economic impact payments to individual taxpayers of $600 making $75,000 or less per year and $1,200 for married couples making up to $150,000 per year, as well as $600 payments for dependent children.
2) A 2nd round of PPP loans will be available to both first-time qualified buyers and businesses previously receiving a PPP loan. The criteria for loan eligibility include 1) 300 or less employees 2) demonstration of a 25% or greater decline in business revenue in any 2020 quarter as compared to the same 2019 quarter, and 3) have spent or will spend completely any 1st round PPP loans received appropriately. Maximim loan amount is $2,000,000. There is a simplified loan forgiveness process for loans of $150,000 or less. Language included in the bill states that allowable business expenses (payroll, rent, covered mortgage interest, and utilities) paid with forgiven loan proceeds are tax-deductible, contrary to prior IRS guidance. This applies to both 1st and 2nd rounds of PPP loans.
Section 179 Deduction & Bonus Depreciation
You may deduct up to $1,040,000 of qualified busines fixed asset purchases including vehicles and equipment for 2020, and your potential deduction is phased out once your fixed asset purchases for the year exceed $2,590,000.
The code 168(k) first-year bonus depreciation available through 2026. The depreciation percentage is 100% property placed in service after September 2017 and through 2022. The 100% percentage phases down from 80% to 20% from 2023 to 2026. Eligible business property must have a recovery period of 20 years or less, original use must begin with the taxpayer (with certain limited exceptions for used property, must generally be purchased new), and placed in service within a specified time period.
Standard Deduction
Stanadrd deduction amounts for 2020 tax filers are $24,800 for married filing jointly, $12,400 for single filers, and $18,650 for those qualifying for head of household status. These amounts are significantly greater than some years ago and effectively mean that the majority of filers who may have been able to itemize deductions will now find it advantageous to simply take the standard deduction as it will be greater.
Electronic Filing for Form 1040X (Amended Returns)
The Internal Revenue Service will begin accepting electronically filed amended tax returns this year. Expect up to sixteen weeks for the Service to process returns.
CARES Act Charitable Contribution Deduction
Per the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), and new for 2020, taxpayers may deduct up to $300 of charitable contributions if claiming the standard deduction. Eligible contributions must be made in cash to an IRS approved and qualified organization. Further, the TCJA (Tax Cuts and Jobs Act of 2017) raises the contribution base from 50% to 60% of income for years beginning after 2017. You will have to still need to be able to itemized deductions to take advantage of the increased income limitation.
IRA Contributions
2020 IRA contributions may be made up to a maximum contribution of $6,000 (under 50 years old), or $7,000 if you have reached 50 years of age by year-end. You must have income including salary, wages, or self-employment income equal to or exceeding your IRA contribution in order for it to be deductible. New tax law for 2020 does away with prior age restrictions on making traditional IRA contributions in most instances provided you still have earned income.
Differences between traditional IRAs and Roth IRAs include 1) Roth IRA contributions are not tax deductible 2) the ability to contribute to a Roth is subject to certain income limit restrictions, and 3) you are not required to take minimum distributions from a Roth at age 72 as you are with a traditional IRA. Maximum Roth contributions are subject to the same dollar limits as a traditional IRA described above. The ability to contribute to a Roth in 2020 begins to phase out when income exceeds $196,000 for married filing jointly, and $124,000 for single and head of household filers.
Social Security Benefits
Social security benefits are not included in taxable income if what is termed provisional income isn't greater than the following 1) $25,000 for single or head of household filers or 2) $32,000 for married couples filing jointly. Provisional income is modified adjusted gross income plus 1/2 of social security benefits before any inclusion of taxable social security benefits in most circumstances.
When provisional income exceeds $25,000 for single and head of household filers, and is less than $34,000, up to 50% of your benefits are included in taxable income. If married filing jointly, the window for up to 50% taxation of benefits is from $32,000 to $44,000. Further, once provisional income exceeds $34,000 for single and head of household filers, and $44,000 for married couples, up to 85% of social security benefits are included in taxable income.
You may elect to have federal income taxes withheld from your social security benefits by contacting the Social Security Administration. North Carolina does not tax social security benefits regardless of income.
Maximum Earnings for Social Security
Social Security (FICA) taxes will be calculated on earnings up to $137,700 for 2020. There is no limit on the amount of earnings subject to Medicare taxes.
Health Savings Accounts
Health savings accounts are set up for the purpose of paying qualified medical expenses for the participant who is covered under a high-deductible health insurance plan. Contributions to an account are deductible by eligible taxpayers and reduce adjusted gross income. 2020 contribution limits are $3,550 for individuals and $7,100 for families. Distributions from an HSA account are not taxable provided they are used to pay for medical expenses. Taxes and a 20% penalty may apply for those distributions used for other purposes.