****THE FOLLOWING IS EXTREMELY IMPORTANT INFORMATION
This is an outline of some of the biggest changes to the new tax law that went into effect for the 2018 tax year and are still in effect in addition to new tax benefits offered in the Covid Cares Act of 2020.
The Covid Cares Act permits you to withdraw up to $100,000 from your retirement accounts (Traditional IRA, Roth IRA, 401K, 403b, SEP) as long as you were impacted economically by the pandemic in 2020. If you are younger than 59 1/2 years old you would normally receive a 10% penalty for an early withdrawal from theses types of accounts but through the Cares Act they are waving this. You will still owe tax on the amount you withdraw but you are able to spread that tax burden evenly over 3 years. If you are able to recover economically you then have the option to deposit the funds back into you retirement account within those 3 years and get a refund of the taxes you previously paid.
In the spring of 2020 the government offered a stimulus of $1,200 for single filers and $2,400 for married filers. The Treasury Department used the incomes determinations from either the previously file 2018 or 2019 tax returns. You got the full amount if you made less than $75,000 AGI for a single filter and $150,000 AGI for married joint filers. If you made more than that the amount diminishes $5 for every additional $100 of income and phased out completely if you made more than $99,000 AGI as a single filer and $198,000 AGI as married joint filers. Many didn't qualify for stimulus payments due to higher incomes in 2018 and 2019 but suffered great financial hardships during 2020. For those taxpayers they will be able to apply for the Recovery Rebate Credit by using your 2020 income and requesting the stimulus that you might have not qualified for previously. There is currently a new stimulus being rolled out in Congress for the beginning of 2021 and they will be using the income on the 2019 tax return for that. If you want to look up your AGI for 2019 pull up your 2019 tax return and look at Form 1040, line 8b.
The Child Tax Credit and the Earned Income Tax Credit will use your income in 2019 in addition to 2020’s income, compare them and then use the income that gets the largest credit if you qualify for either of these credits. Of course the first one is for those of you with dependent children and the second one is for very low income tax payers.
The current 7-tier tax bracket will be reduced to four tax brackets. They are as follows:
10% - Income $0 to $9,875
12% - Income $9,876 to $40,125
22% - Income 40,126 to $85,525
24% - Income $85,526 to $163,300
32% - Income $163,301 to $207,350
35% - Income $207,351 to $518,400
37% - Income $518,401 and up
10% - Income $0 to $19,750
12% - Income $19,751 to $80,250
22% - Income $80,251 to $171,050
24% - Income $171,051 to $326,600
32% - Income $326,601 to $414,700
35% - Income $414,701 to $622,050
37% - Income $622,051 and up
This next section is particularly important to your deductions as taxpayers.
The standard deduction is for those that don’t have itemized deductions that add up to or more than the standard deduction that the government gives you. Back in 2017 the standard deduction was $6,350 for a single filer, $9,350 for head of household and $12,700 for a married filer. Under the 2020 plan they nearly double the standard deduction so that single filers can deduct $12,400, $18,650 for head of household and married filers can deduct $24,800. This sounds appealing on paper but there are hidden factors here. Under the old system each taxpayer AND EACH OF THEIR CHILD DEPENDENTS got an additional $4,050 deduction called personal exemptions. This deduction has been eliminated. For example in the old 2017 system a married couple with 3 children would get a standard + personal exemption deduction of $32,950 ($12,700 for married filers + $8,100 for their personal exemption + $12,150 for their three children). But in the current tax plan that same family would get a total of $24,000 in the deduction.
The credit increases up to $2,000 per child, and the first $1,400 is refundable, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit increases from $110,000 to $400,000 for married couples filing jointly. The expanded credit ends after 2025. There is also an update through the Covid Cares Act that I illustrated above.
This is the area that has the most dramatic changes. The new law raised the standard deduction and therefore eliminated most of the itemized deductions. Itemized deductions are things like medical expenses, state and local taxes, mortgage interest, property and personal property taxes, charitable contributions, tax preparer expense & unreimbursed employee job expenses. If these deductions add up to more than your allotted standard deductions then you are allowed to use those to your benefit instead of the standard deduction.
The following aforementioned deductions remain:
The following are the deductions which the 2018 new tax laws eliminated :
Moving Expenses for Work - The old plan allows a taxpayer to deduct these expenses if there new job is full-time and the new location is more than 50 miles from their previous location. It should be noted that this deduction is still allowed for businesses even if they move their business overseas.