Though it may only seem like last year – which it was – the 2020 tax season is upon us. It’s never too soon to begin preparing for the storm that lies ahead. After all, the better prepared you are, the less difficult the task will be.
The information in this guide is taken largely from the IRS Form 1040 Instructions released on October 22, 2020. Be aware that this document is a draft, which means the IRS could make additional changes between now and early January when the final version of the document is released. But it is an excellent source for preliminary information, since little is likely to change in the final version.
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Let’s start with the major tax changes for 2020
Fortunately, there haven’t been any major changes from 2019 to 2020. But there have been minor changes in the specific numbers, and some special circumstances related to COVID-19.
Economic impact payments (CARES Act). This is the economic stimulus plan payments sent to each adult in the amount of $1,200, plus $500 for each qualifying child. If you received this payment in 2020, remember that it is not taxable.
But if you did not receive the payment during 2020, and you are eligible, you may be able to claim a recovery rebate credit on your 2020 income tax return. The only difference is that your eligibility will be determined by your income for 2020, rather than for 2018 four 2019.
Charitable contributions. New regulations for 2020 permit taxpayers to qualify for a deduction of charitable contributions for up to $300, even if you don’t itemize your deductions.
IRA contribution deductibility expanded. You can now make tax-deductible IRA contributions past age 70 ½.
Child tax credit. Remains at $2,000 per child under the age of 17 at the end of 2020. The income range for the phaseout of the credit also remains the same at a modified adjusted gross income of $200,000 for single filers, or $400,000 if married filing jointly.
Related: TurboTax Review
Do you need to file a 2020 income tax return?
Below are the tax threshold amounts for 2020. However, read a bit further down for additional situations where you may still need to file, even if your income is below the thresholds. In each case, the standard deduction has increased by a few hundred dollars over 2019.
- Single, under 65 – $12,400
- Single, 65 or older – $14,050
- Married filing jointly, both spouses under 65 – $24,800
- Married filing jointly, one spouse 65 or older – $26,100
- Married filing jointly, both spouses 65 or older – $27,400
- Married filing separately, any age – $5
- Head of household, under 65 – $18,650
- Head of household, 65 or older – $20,300
- Qualifying widow(er) with dependent child, under 65 – $24,800
- Qualifying widow(er) with dependent child, 65 or older – $26,100
Even if your income is below these thresholds, you may still need to file a return if any of the situations below apply to you:
- You had at least $400 in self-employment income
- You owe household employment taxes
- Social Security and Medicare taxes are owed on unreported tip income
- You received a distribution from a medical savings account (MSA) or a health savings account (HSA)
- You received an advance payment on the Premium Tax Credit
- Expect to qualify for the earned income tax credit (EIC)
- You want to claim a refundable Health Coverage Tax Credit (set to expire at the end of 2020)
- You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare tax.
- If for any reason you may be subject to the Alternative Minimum Tax (AMT).
- You are subject to additional tax on a qualified retirement plan, including an IRA
If you’re still not sure whether or not you need to file a return, you can use the Do I Need to File a Return tool offered by the IRS.
Related: FreeTaxUSA Review
How do you know if your child may be subject to the “Kiddie Tax?”
The “Kiddie Tax” applies only if your child has investment income that exceeds certain thresholds. It only applies to dependents who are either under the age of 19, or are full-time students under the age of 24.
Earned income limits for your child or children are the same as they are for adults. But if your child has significant investment income, the Kiddie Tax may come into play. That’s true even if his or her earned income doesn’t rise to the level of needing to file a return.
Below are the thresholds for 2020:
- First $1,100 – no tax due (unearned income exemption)
- Above $1,100 – income taxed at the child’s rate
This is a change that was implemented as part of the 2017 Tax Cuts and Jobs Act. Previously, a child’s unearned income would have been taxed at the parents’ rate if it exceeded $2,100, which would have been a higher rate than the child’s. But now the parent’s tax rate no longer matters.
Important 2020/2021 tax dates to be aware of
Below are important dates for filing your 2020 income tax return, as well as additional dates that may be important for filing your 2021 return next year:
January 15, 2021 – Last federal income tax estimate due for the 2020 tax year
April 15, 2021 – First quarter federal income tax estimate due for the 2021 tax year
April 15, 2021 – Deadline for filing 2020 Individual Income Tax returns; and for what it’s worth, it falls on a Thursday this year
April 15, 2021 – Last day to make a 2020 IRA contribution (Keogh and SEP contributions can be made as late as October 15, 2021, if you file for an extension)
June 15, 2021 – Second quarter federal income tax estimate due for the 2021 tax year
September 15, 2021 – Third quarter federal income tax estimate due for the 2021 tax year
October 15, 2021 – Extended individual income tax return due for 2020
January 15, 2022 – Fourth quarter federal income tax estimate due for the 2021 tax year
Retirement plan contribution deadlines vary according to the type of plan you participate in. The final contribution due dates for various plans are as follows:
IRAs – Your contribution must be made by April 15, 2021.
Keogh and SEP IRAs – Contributions can be made as late as October 15, 2021, as long as you have filed for an extension on your taxes by April 15.
Employer-sponsored 401(k) and 403(b) plans – Contributions were required to be made by December 31, 2020, for 2020.
What kinds of income are taxable?
The most common forms of taxable income include:
- Wages and salaries
- Income from self-employment
- Tips and gratuities
- Unemployment benefits
- Moving expense reimbursements
- Canceled or forgiven debt
- Alimony (which is only includable pursuant to a divorce decree executed before December 31, 2018)
- Income from bartering arrangements
- Gambling winnings
- Pension, annuity, and retirement plan income
- Social Security benefits
- Interest and dividends
- Capital gains on the sale of investments or investment securities
Income sources that are NOT taxable include:
- Child support
- Alimony received pursuant to a divorce decree executed after December 31, 2018
- Insurance proceeds received from a policy on which you paid the premiums (they may be taxable if the premiums were paid by another party, like your employer)
- Veterans benefits
- Aid to Families with Dependent Children (AFDC)
- Meals and lodging for the convenience of your employer
Related: H&R Block Review
What you’ll need to file your 2020 income tax return
Gathering all the necessary documentation to file your income tax return is probably the most complicated part of the process. But once you have all the documentation you need in one place, it’s just a matter of filling in the blanks–at least if you’re using tax preparation software.
Basic information you’ll need to have available includes:
- Complete copies of your 2019 income tax return. You may need this to provide certain information, particularly any carryforward numbers, such as those related to business losses or capital loss carryforwards.
- Social Security numbers for you, your spouse (if you’re married filing jointly or separately), as well as each of your children or other dependents.
- Your ex-spouse’s Social Security number if you receive or pay alimony or child support.
Income documentation you’ll need to prepare your return includes:
- W2s from any employment sources
- Income information for your dependent children (W2s, 1099s, etc.)
- 1099-MISC for additional income for which income taxes were not withheld (like contract, gig, or freelance income)
- 1099s reporting Social Security income, interest and dividends; pension, IRA or annuity income; state income tax refund or unemployment insurance; reporting the sale of stock or other securities; or cancellation/forgiveness of debt income
- K-1’s reporting partnership or S-Corporation income
- W-2G reporting gambling winnings (you should also have records proving gambling expenses)
- Documentation of alimony received, including the Social Security number of the payee
- If you’re self-employed, a complete accounting of all your business income and expenses
- Evidence of rental income received if you own investment property
Documentation you’ll need for tax-deductible expenses
As noted earlier, far fewer people will be able to itemize their deductions under the new tax law. But if you think you still can, you’ll need to gather the following documents:
- 1098 reporting mortgage interest and property taxes paid, educational expenses, and student loan interest paid
- Statements from charities reporting contributions
- 1095-A, 1095-B, or 1095-C, reporting health insurance premiums paid, and to whom
- Various forms 5498 reporting IRA, HSA or ESA payments made during the year
- Home office information (if you plan to take the deduction) – square footage of your office, and of your home
Related: TaxSlayer Review
Additional expense documentation you may need
There are additional expenses that may be tax-deductible, however, they may not be provided by a third-party reporting source. If that’s the case, you may also need to gather the following documents:
- Expenses for rental property
- Documentation for the purchase of depreciable assets for business or investment activity
- Property taxes paid but not reported on Form 1098 by a lender
- Federal and state estimated tax payments made for the tax year
- Cost basis of investments sold (if the information is not provided by a broker)
- Indirect expenses related to investment activity
- Documentation of alimony paid
- Receipts from the purchase of energy-efficient equipment installed in your home
- Charitable contributions made but not reported by the receiving organization
- Mileage driven for business, employment, medical or charitable activities, as well as records of payment for tolls, parking, and ad valorem taxes
- Evidence of payment of health insurance, out-of-pocket medical, dental, and vision expenses, medical mileage, and long-term care insurance
- Childcare expenses paid, if not supplied by the provider (including the provider’s tax id number)
- Wages paid to a domestic care provider, including that provider’s tax ID number
- An itemized list of higher education expenses paid out-of-pocket, with documentation
- Cost of preparation of last year’s income tax returns
- Sales tax paid on major purchases (which may not apply due to the new limit on state and local taxes)
Income tax brackets for 2020
The various income tax brackets for 2020 are only slightly changed from 2019. There are seven tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Here are the federal income tax brackets for 2020:
|Tax Rate||Taxable Income (Single Filer)||Taxable Income (Married, Filing Jointly)||Taxable Income (Married, Filing Separately)||Taxable Income (Head of Household)|
|10%||$0 to $9,875||$0 to $19,750||$0 to $9,875||$0 to $14,100|
|12%||$9,876 to $40,125||$19,751 to $80,250||$9,876 to $40,125||$14,101 to $53,700|
|22%||$40,126 to $85,525||$80,251 to $171,050||$40,126 to $85,525||$53,701 to $85,500|
|24%||$85,526 to $163,300||$171,051 to $326,600||$85,526 to $163,300||$85,501 to $163,300|
|32%||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350||$163,001 to $207,350|
|35%||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $311,025||$207,351 to $518,400|
|37%||$518,401 or more||$622,051 or more||$311,026 or more||$518,401 or more|
2020 personal exemptions and standard deduction amounts
We briefly cover this topic in our 2018 edition of this guide, but it’s worth repeating. The personal exemption – that was $4,050 in 2017 – no longer applies. Personal exemptions were eliminated with the 2017 tax reform, and sort of replaced by the doubling of the standard deduction.
Now that we’ve cleared up that issue, let’s move on to the standard deductions for 2020. The amounts are as follows:
- Married filing jointly and surviving spouses – $24,800
- Head of household – $18,650
- Married filing separately – $12,400
- Single – $12,400
As a reminder, the standard deduction is deducted from your income–along with other permitted deductions–before calculating your income tax liability.
Other changes in deductions for 2020
These changes actually took effect during the 2018 tax year. But they’re worth repeating because they represent a significant difference from deductions that existed in the tax code up until 2017.
The mortgage interest deduction. December 15, 2017, is an important date with regard to the mortgage interest deduction. If you secured a home mortgage prior to that date, you can deduct the interest on that indebtedness on loans up to $1 million.
But if you’ve taken on mortgage indebtedness after that date, you can take a deduction for mortgage interest paid on indebtedness up to only $750,000. If you’re married filing separately, the interest deduction is limited to indebtedness of no more than $350,000.
And though it’s not a change from 2019, mortgage interest on a second mortgage or home equity line of credit is deductible, but the proceeds must be used to “buy, build, or substantially improve” your home. You won’t be able to deduct interest paid on secondary financing if the funds were used for purposes not related to your home.
Deduction for state income, real estate, and sales tax limited. Referred to as the “SALT deduction” (for State And Local Taxes), your deduction is limited to $10,000 if you are married filing jointly, or $5,000 if you’re single. That includes all non-federal taxes, such as state income tax, sales tax, and real estate taxes on your primary or secondary residence.
Other expenses that were deductible through 2017 that have been completely eliminated include:
- The deduction for job-related expenses and other miscellaneous deductions.
- The deduction for qualified tuition and fees.
- Deduction for mortgage insurance premiums.
Medical expense deduction. Taxpayers who itemize their deductions have limits on deductions for medical expenses. For 2020, you can deduct unreimbursed medical expenses that exceed 10% of your adjusted gross income. For what it’s worth, the threshold was 7.5% in 2018.
Mileage allowances. The mileage allowances for 2020 are as follows:
- Business mileage – 57.5 cents per mile
- Charitable mileage – 14 cents per mile (unchanged from 2019)
- Medical and moving mileage – 17 cents per mile
Qualified business income (QBI) deduction. This is another change that took place in 2018. You may be able to deduct up to 20% of your qualified business income from your qualified trade or business, plus 20% of your qualified real estate investment trust dividends, and qualified publicly traded partnership income.
As was the case in 2018 and 2019, the deduction phases out at certain income levels. These thresholds have been increased slightly for 2020. The new income ranges are:
- Single and head of household – $163,300 to $213,300
- Married filing separately – $163,300 to $213,300
- Married filing jointly – $326,600 to $426,600
Related: TaxAct Review
Net Investment Income Tax (NIIT) thresholds on higher incomes
When the Affordable Care Act (ACA) was rolled out in 2010, various funding mechanisms were put in place to help pay for it. One is known as the Net Investment Income Tax, or NIIT. It extends the Medicare tax on investment income, at an annual rate of 3.8%.
The tax is imposed on investment income if you earn in excess of certain thresholds. Those thresholds are the same in 2020 as they were in 2019, and are as follows:
- Married filing jointly – $250,000
- Married filing separately – $125,000
- Single – $200,000
- Head of household – $200,000
- Qualifying widow(er) with dependent child – $250,000
If your adjusted gross income exceeds these thresholds, the tax will be applied to net income from rents, royalties, interest and dividend income, capital gains, and annuities. It will also apply to any passive income from your trade or business.
Fortunately, the tax doesn’t apply to all unearned income. For example, it is not assessed on income from Social Security, pensions, or on any gain on the sale of your primary residence.
The Alternative Minimum Tax (AMT) for 2020
Not one person in 100 has even a remote concept of how this works. Most accountants couldn’t even calculate it–that’s how complicated it is. But millions may be subject to the AMT, and that’s why you should have at least a high-altitude idea of what it is.
Basically, the AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. This can include either preferential income or excessive deductions. It imposes a higher tax rate based on those income and deduction amounts.
For 2020 the AMT applies beginning at the following income thresholds:
- Married filing jointly and surviving spouse – $111,700 $113,400 (exemption phase-out begins at an income of $1,020,600 $1,036,800).
- Single – $71,700 $72,900 (exemption phase-out begins at an income of $510,300 $518,400).
- Married filing separately – $55,850 $56,700 (exemption phase-out begins at an income of $510,300 $518,400).
The AMT is one of the most compelling reasons to use tax preparation software, particularly if you’re a high-income taxpayer.
Capital gains tax rates for 2020
Investors are given the benefit of a lower federal income tax rate on qualifying dividends and investments they hold for more than 12 months.
The capital gains tax rates for 2020, are as follows:
|Your Filing Status||0% Tax Rate||15% Tax Rate||20% Tax Rate|
|Single||$0 to $40,000||$40,001 to $441,450||$441,451 or more|
|Married filing jointly||$0 to $80,000||$80,001 to $496,600||$496,601 or more|
|Married filing separately||$0 to $40,000||$40,001 to $248,300||$248,301 or more|
|Head of household||$0 to $53,600||$53,601 to $469,050||$469,051 or more|
If your income exceeds any of the above thresholds for your filing status, any capital gains income will be subject to ordinary income tax rates, which will range between 10% and 37%. Investments sold within one year of purchase – referred to as short-term capital gains – will also be subject to ordinary income tax rates.
The best ways to file your income tax return for 2020
If you’ve found the tax code to be more than a little bit complicated in the past, it’ll be even more so in 2020, due to the many changes that have taken place since 2017.
Hopefully, you’re not still preparing your income taxes manually. Even if you have a very simple tax return, it can turn into a nightmare due to the changes.
DIY tax preparation software
Tens of millions of people are now preparing their tax returns using tax preparation software. This is an excellent strategy since the software will fully incorporate all tax changes for 2019. You simply have to fill out the information requested, and the software will handle all the technicalities for you.
In addition, you’ll be able to either e-file or print your return, so it will be complete for filing. The software will even direct you where to send your return, as well as prepare a payment coupon if you owe additional tax. It will even calculate the IRS penalty, so you can pay it with your return, and not have to face a disturbing letter from the IRS while you’re trying to relax and enjoy your summer.
Tax preparation software has evolved to the point that it can handle many of the most complicated tax returns. This can include those that involve rental real estate, partnership interests, and self-employment. And if you need to make tax estimates, the software will both print IRS forms 1040ES, as well as instructions on where to send your estimated payments.
Some of the best tax preparation software available includes TurboTax, H&R Block, TaxSlayer, and TaxAct, among others. You can read all about them in our article Comparing The 5 Best Tax Software Programs before making your selection.
You can also start by investigating our post What Is The Cheapest Tax Software? This can be an excellent starting point because most tax preparation software plans have free versions. You can investigate those versions, as well as consider any premium services they offer for more complicated returns. In that way, you can construct ta software for you, based on a buffet table of services, and their respective costs.
Using a professional tax preparer
If you don’t feel comfortable preparing your own taxes using one of the popular tax preparation software plans, you can always opt to have your return prepared by a tax professional. This may be the preferred way to go if you have an especially complicated tax situation, and even more so if you’re concerned about the risk of an IRS audit.
If you hire a professional, you should either go with a CPA or an enrolled agent.
Certified Public Accountant. CPAs are trained tax professionals. Not only do they have access to a wealth of information on the tax code, but they also regularly attend training sessions to keep them current on the latest changes and complications, and use some of the most advanced tax software available.
They can handle the most complicated tax situations, and even represent you before the IRS in the event of an audit. The disadvantage of using a CPA is that they are generally the most expensive tax preparation option, and by a wide margin at that.
Enrolled agents (EAs). These are professional tax preparers who are licensed to prepare taxes, as well as to represent you before the IRS in an audit. They’re a less expensive way to get your taxes prepared by a third party. And while many are very good at what they do, the standards are not necessarily as high as they are for CPAs.
How to get access to a tax professional without paying the higher fee
If you don’t want the expense and complication of working with a professional tax preparer, you can still consider using tax preparation software. Some services, like TurboTax and H&R Block, will provide direct professional tax preparer assistance in the preparation of your return for an additional fee.
With TurboTax, that can mean having either a CPA or an enrolled agent remotely accessing your computer to help you prepare your return. In the case of H&R block, you can move the preparation over to a preparer at one of their thousands of offices across the country. And either service can provide audit representation before the IRS for an additional fee.
What if you need to file an extension?
You can request an extension, and it will be granted automatically. You can do this by filing IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. It must be filed no later than midnight, April 15, 2021.
By filing the form, you’ll get an extension through October 15th, 2021. That will give you a full six months to complete your return. But don’t wait until the last minute if you plan to file by October 15th. There are no more extensions beyond that date.
It’s also important to understand the extension applies only to the filing of your tax return. It does not give you an extension to pay any income tax you owe. If you don’t make your full tax payments by April 15th, interest in penalties will be assessed on the unpaid balance.
What if you can’t pay your taxes by the due date?
If you owe more than you can pay by the due date, you do have a couple of payment options.
Request more time to pay. The IRS will provide up to 120 days to pay the amount of tax you owe. To do this, you will need to contact the IRS and request additional time to pay. This request must be made and approved prior to the tax filing date.
Set up an installment payment plan. If you won’t be able to pay the tax due within 120 days, you can apply for an Installment Agreement with the IRS. This will give you up to 72 months to pay your tax debt. But if the amount due is greater than $25,000, you will need to complete a financial disclosure.
Whether you’re permitted more time to pay your tax bill, or you set up an installment agreement, interest and penalties will apply to the unpaid balance. It’s not a perfect arrangement, but at least you can rest assured knowing you won’t go to debtor’s prison because you can’t pay your taxes!
Related: What Is Tax Evasion?
How long will it take to get your refund?
If you file your return electronically, the refund is generally processed within 21 days of the e-file acceptance date. In most cases, it will be less. If you file a paper return, it will take between six to eight weeks.
You can use the IRS Where’s My Refund tool to track the progress of your refund. However, if you use tax preparation software, the software itself may track your refund, and let you know when to expect its arrival.
Related: Tax Refund Schedule
Final thoughts on filing your 2020 taxes
This is everything you need to know about filing your 2020 taxes–at least subject to any last-minute revisions or tweaks. Unless you’re prepared to pay the high fees of a professional tax preparer, we strongly recommend you choose tax preparation software that looks to be a comfortable fit. Good tax preparation software will take care of all the details for you.
Credit Karma Tax is one of those companies. They offer free federal AND free state returns and can tackle most of the complex situations you need. Credit Karma Tax provides an Audit Defense guarantee as well as a Maximum Refund guarantee and vow never to charge you to file your tax returns.