Tax deductions allow you to reduce the amount of income that you pay tax on. Each year, tax law changes may affect how many deductions you have available to you and how much you can claim on your tax return. Learn about the tax deductions 2020 saw leave or change.
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Be better equipped to take advantage of the changes in tax credits and tax deductions for 2020, the taxes you’ll file in 2021. After all, filing taxes early has its benefits.
Learn more about what tax deductions will change in tax year 2020, and whether others will sunset, amount to less, or remain the same but have different qualifications.
What are tax deductions and how do they work?
Tax deductions work by lowering your taxable income for the year. You tally your total taxable income and then reduce this by each deduction you qualify to take. After applying each tax deduction, your taxable income drops and typically results in a lower tax bill.
Which tax deductions are going down or changing?
When preparing your taxes, you generally have two ways to claim tax deductions: take the standard deduction or itemize. You can't do both. What differs for 2020 is the ability to claim a special $300 deduction for qualified charitable donations on top of the standard deduction. The CARES Act allowed for this one-time deduction for tax year 2020. For the 2021 tax year this limit doubles to $600 if you are married filing jointly. After 2021, you will need to itemize your deductions once again to take any charitable contribution deductions.
The standard deduction ensures that all taxpayers have at least some income that does not fall subject to federal income tax. Each year, the standard deduction generally increases; 2020 is no exception.
In 2020, the standard deduction amounts to $12,400 for single taxpayers and married taxpayers who file separate returns, while married couples filing jointly can claim an amount twice that size at $24,800. Heads of household can claim a standard deduction of $18,650.
Another tax deduction 2020 saw broaden came in the form of higher contribution limits to health savings accounts. These accounts act as a tax-deferred way to help cover the healthcare costs paid as part of carrying coverage under a high deductible health insurance plan. You can deduct money you place into an HSA, within certain limits.
For 2020, the IRS limit comes to $3,550 for singles or $7,100 for families. If you're over age 55, you can contribute an additional $1,000.
When paying for tuition, fees, and other qualifying expenses to enroll in higher education courses, you may have the ability to claim either the American Opportunity tax credit (AOTC) or the Lifetime Learning Credit (LLC). Until the end of 2021, you can also claim an "above-the-line" deduction for the tuition and fees you paid during 2020. After 2020 the provision repeals the qualified tuition deduction and replaces it by increasing the phaseout on the LLC.
The CARES Act also provided for Recovery Rebate Tax Credits, or payments more commonly referred to as stimulus checks. If you did not receive the full amount of recovery rebate for which you are eligible as an advance payment, you can claim this Recovery Rebate Credit on your 2020 tax return.
Which tax deductions are going away at the end of tax year 2020?
Certain significant tax deductions 2020 provided are set to expire at the end of the year unless Congress votes to extend them. Some of the most important include:
- Unreimbursed medical and dental expenses: If you itemize your deductions, you can claim any qualified unreimbursed medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). The AGI floor for these medical expenses was set to go up to 10% of AGI but legislation passed lower the level to 7.5% for 2020.
- Mortgage insurance premiums: If you pay private mortgage insurance on your home and have AGI of $100,000 or less, you can deduct these premiums within certain limits until the end of 2020. The benefit phases out between AGI of $100,000 and $109,000.
Have any tax deductions remained the same but adjusted their qualifications?
Many tax deductions for 2020 will remain the same as the previous year, though the qualifications for them might be different:
- Traditional individual retirement accounts (IRA): In 2020, contributions phase out for IRAs at new AGI levels. For traditional IRAs, contributions phase out between AGIs of $196,000 to $206,000 for married filers and $124,000 to $139,000 for single filers (up from $193,000 to $203,000 and $122,000 to $137,000, respectively, in 2019).
- Roth IRA: Likewise, for Roth IRA contributions, their income phaseouts increase to AGIs of $104,000 to $124,000 for married filers and $65,000 to $75,000 for single filers (up from $103,000 to $123,000 and $64,000 to $74,000, respectively, in 2019).
- 401(k) and 403(b) plans: The general limit on total employer and employee contributions for 2020 is the lesser of $57,000 or 100% of your compensation (up to a max of $285,000, up from $280,000 in 2019).
- Health savings accounts: If you have a conforming high deductible health plan and can contribute to a health savings account for qualifying medical expenses down the road. The contribution limits increased to $3,550 for self-only coverage and $7,100 for family coverage, up from $3,500 and $7,000 in 2019, respectively.
- AMT exemption: The Alternative Minimum Tax exemption amount for 2020 is $72,900 and begins to phase out at $518,400 ($113,400 for married couples filing jointly whom had the exemption begin to phase out at $1,036,800), up from $71,700 with phaseouts beginning at $510,300 ($111,700 for married couples filing jointly with the exemption beginning to phase out at $1,020,600 in 2019).
- Foreign earned income exclusion: The foreign earned income exclusion increases to $107,600 in 2020, up from $105,900 in 2019.
- Educator expense deduction: For tax year 2020, educators can use the educator expense deduction to cover COVID-19 related expenses for personal protective equipment (PPE). This includes supplies such as hand sanitizer, plexiglass screens, disinfectant, and masks.
- Mortgage debt forgiveness: In most instances, forgiven debt is counted as taxable income because removing liabilities from your name amounts to the same as receiving income in the eyes of the IRS. Congress made a special exception for forgiven mortgage debt of up to $2 million if used to buy, build, or substantially improve your principal residence. The Consolidated Appropriations Act, 2021 reduced this amount to $750,000 ($375,000 if married filing separately) and extended it through the end of 2025.
How to deal with the changes to tax deductions in tax year 2020
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