Filing your income taxes can be a stressful event, especially in a year where the tax rules seemed to change week to week. Here are a few things you may want to know before filing your 2020 taxes.
Tax Deadline Extended
For this year only, the individual federal income tax return filing deadline of April 15th has been extended to May 17th. The IRS made this change in mid-March to allow individuals to dissect and understand the new COVID-19 stimulus bill and tax benefits announced in the American Rescue Plan. However, it is important to note that this extension applies to individual filers and not to corporations or small businesses. Businesses are still accountable to the usual April 15th deadline. Further, anyone who pays estimated taxes, including small businesses, must still pay quarterly estimated payments by April 15th. Additionally, tax payers living in Texas, Oklahoma and Louisiana, the states affected by severe weather earlier this year, were granted an IRS extension to June 15th.
It is important to note that individual states set their own tax deadlines and may or may not comply with the federal IRS extension. The California Franchise Tax Board (FTB) extended the deadline for individual taxpayers to May 17th, in coordination with the Federal standard, but tax deadlines vary from state to state.
IRA Contributions Extended
Many people uncertain about their financial position waited to make contributions to retirement savings accounts in 2020. Given the noted federal tax filing extension, eligible persons also have until May 17th to make Traditional IRA, Roth IRA, SEP IRA, Health Savings Account (HSA), Archer Medical Savings Account (MSA) and Coverdell Education Savings Account (ESA) contributions. However, many banks are inundated with customer transactions related to the tax filing deadlines, and therefore processing is taking longer than usual. If you want to make a savings contribution for the 2020 year, thereâ€™s still time, but act now to ensure your deposit is recorded!
Recovery Rebate Credit
Between 2020-2021, there were three rounds of stimulus checks sent out to Americans in distress. Each round had income qualifications that were measured based on your 2019 income tax filling. However, for many, their 2019 income tax filing presented higher income than what they received in 2020 due to volatility in employment related to COVID. When filing your 2020 tax return, tax filers can apply for the stimulus checks they qualified for, but didnâ€™t receive (or didnâ€™t get as much as they were entitled to receive) in the form of a tax credit called the Recovery Rebate Credit. The rebate will reduce the taxes you owe, and can even be credited back to the taxpayer in the form of a refund. There is a Recovery Rebate Worksheet that can be completed by your CPA when preparing your tax return and the calculation will flow through to line 30 on your 1040 federal tax filing.
As a reminder, the stimulus payments are not taxable as income. Therefore, the payments are not included in taxable income when determining if you are eligible for the benefits program.
To assist those affected by COVID-19, the American Rescue Plan added a provision in March 2021 to allow the first $10,200 of unemployment benefits for individuals ($10,200 each, for joint tax filers) to be excluded from taxation if total household income was below $150,000 during the 2020 tax year. It is important to note that although the tax exemption is $10,200 per person, the household income threshold of $150,000 applies whether the tax filer is single or joint. If you already filed your tax return and paid taxes on the first $10,200 unemployment income received, it may make sense to ask your CPA if you should amend your previously filed tax return.
Medical Expense Deductions
Medical bills can be daunting and many incurred higher medical expenses in 2020. If your medical expenses were higher than your 2020 standard deduction ($12,400 for Single, $24,800 for Married Filing Jointly) you may deduct them if the expenses exceeded 7.5% of your adjusted gross income (AGI). The medical expense threshold was supposed to return to 10% of AGI, but due to COVID, has been pegged permanently at 7.5%, per the Consolidated Appropriations Act in December 2019. You can include the cost of nursing home care, if such costs were sustained for medical service needs. For a full list of the many eligible medical expenses, visit https://www.irs.gov/taxtopics/tc502.
Many non-profit organizations were hit hard financially in 2020. To assist in raising donations, the government incentivized individuals to make donations by allowing those who take the standard deduction to deduct up to $300 in cash donations as an above the line dollar-for-dollar reduction of taxable income. In 2021, the benefit was increased to $600 for Married Filing Jointly tax payers. Additionally, for tax filers who itemize, in 2020 & 2021, you can deduct up to 100% of your AGI with cash donations (normally limited to 60% of AGI), allowing for a large write-off under the CARES Act. While many will not gift up to 100% of AGI, or will chose to gift highly appreciated assets instead, like stock, any charitable gifts will surely go a long way towards helping organizations in need, especially small and local organizations.
The tax code has changed, and continues to change rapidly. If you could benefit from a consultation on how the new laws may affect you, reach out to your CPA or Certified Financial Plannerâ„˘ timely.
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