Personal exemptions

The TCJA suspended the deduction for personal exemptions for the 2018 through 2025 tax years.  For some taxpayers, this will be offset by a significant increase in the amount of the standard deduction as well as the increase in the child tax credit from $1,000 to $2,000 per qualifying child and the provision of a new $500 nonrefundable credit for dependents other than qualifying children.

Standard deduction

The standard deduction is a specified dollar amount, based on your filing status that reduces the income on which you are subject to tax.  In general, taxpayers can choose whether to claim the standard deduction or itemized deductions.  However, you are not entitled to the standard deduction if you:

1. Are a married taxpayer who files separately and whose spouse itemizes deductions.
2. Are not a U.S. citizen or resident for the full year.
3. File for a period of less than 12 months due to a change of accounting period.

The standard deduction amounts for all categories of taxpayers were significantly increased by the TCJA.  For 2020, the standard deduction is:

• $12,400 for a taxpayer filing as single or married filing separately
• $18,650 for a taxpayer filing as head of household
• $24,800 for taxpayers filing as married or filing jointly as a surviving spouse.

The increase in the standard deduction introduced by the TCJA, is intended to significantly reduce the number of taxpayers who itemize their deductions and thus to simplify the tax return preparation process.

Deductions for the elderly or blind

An additional standard deduction is available to taxpayers who are elderly or blind.  The additional deduction amounts are $1,650 for single files and heads of household and $1,300 for married taxpayers (whether filing jointly or separately) and qualifying widows and widowers.  These additional amounts are cumulative.  Thus, married taxpayers filing jointly who are both over 65 and blind could claim four additional deduction amounts.

State and local income tax deductions

Under the 2017 law, itemized deductions for state and local income taxes, property taxes, and sales taxes are limited to $10,000 in the aggregate for the 2018 through 2025 tax years.  This cap is not indexed for inflation.  The cap does not apply to personal or real property taxes incurred in carrying on a trade or business or otherwise incurred for the production of income.

Home mortgage interest

The TCJA made significant changes to the deductibility of home mortgage interest that are especially likely to affect you if you purchase a new home from 2018 up until 2025 and incur a mortgage to finance the purchase.  Under the old low, qualified residence interest was deductible on up to $1 million of acquisition indebtedness.  For the tax years of 2018 through 2025, interest on acquisition indebtedness remains deductible but the amount of debt that qualifies as acquisition indebtedness is reduced from $1 million to $750,000.  Any debt you may have incurred before December 15, 2017, is “grandfathered” and thus not affected by this reduction.

When you sell your residence

If you sell your principal residence as a gain, some or all of the gain may be exempt from tax.  However, if you incur a loss on the sale, you may not deduct that loss.  If you file a joint return, you can exclude a gain of up to $500,000 from the sale of your principal residence.  Other taxpayers can exclude up to $250,000. The following conditions must be met

1. You must have owned and lived in the property for at least two years during the previous five years (if filing a joint return, only one spouse has to meet the ownership test)
2. You must not have claimed the exclusion within the past two years. (If filing a joint return, this requirement applies to both spouses)

Qualified opportunity zones

The TCHA established a unique opportunity for taxpayers with capital gains to potentially defer these gains if they reinvest in a Qualified Opportunity Zone (QOZ).  The qualifying capital gain is deferred until the investment is either sold or exchanged on December 31, 2026, whichever is earlier.  To qualify for the program, you must generally reinvest your qualifying capital gains within 180 days of the sale or exchange it into a Qualified Opportunity Fund (the Fund).  The fund must, in turn, invest the gains in a business within a QOZ.  If you hold the Fund investment for more than 10 years, any gain related to the fund investment thereafter may be tax free.

Education: A top investment priority

Various saving/investment alternatives exist.  The major savings vehicles for college expenses are qualified tuition programs, also known as 529 plans, and Coverdell education savings accounts (Coverdell ESAs).  529 plans allow individuals to either prepay tuition credit or make cash contributions on behalf of a beneficiary for payment of qualified higher-education expenses.  In addition, 529 plans may also be used to pay up to $10,000 of expenses per student per year with respect to elementary and secondary schools.

Planning tip:

In 2019 and after, tax-free distributions from 529 plans can also be used to pay for registered apprenticeship programs and to pay down student loans.  There is a lifetime limit for student loan repayments of $10,000 for a beneficiary and each of the beneficiary’s siblings.  Important: No student loan interest deduction is permitted for payments made from the 529 plan.

 

Should you have an IRA (Individual retirement arrangement)?

Traditional individual retirement arrangements (IRA) were first introduced to encourage taxpayers to save for retirement even if their employers did not offer retirement savings plans.  Many working Americans qualify for at least a partial income tax deduction for retirement savings.  You may make a deductible IRA contribution of up to the lesser of $6,000 or 100% of earned income (or $7,000 for individuals age 50 or older).

The SECURE Act created some parity between IRA contribution rules and other contribution – based retirement vehicles (e.g., 401(k) plans and Roth IRAs) by permitting working individuals to continue to make contributions to traditional IRAs past age 70 1/2 for tax years beginning after December 31, 2019.  Individuals who are not yet ready to retire can continue to supplement their retirement savings.

Traditional IRA contributions are generally taxable as ordinary income on distribution.  At age 72 (or at age 71 1/2, if you reached age 70 1/2 by December 31, 2019), you would generally have to start receiving minimum required distributions from the IRA:

Planning tip:

If you are at least age 72 (or age 70 1/2, as applicable) and have a traditional IRA, you may be able to contribute your minimum required distributions from the IRA to a charity (up to $100,000) without having to pay tax on the amount transferred to the charity.

Roth IRAs

A Roth IRA is an IRA with a special tax structure.  Contributions to a Roth IRA are not deductible, but the eventual distributions are not included in income (and thus earnings are distributed tax free).  In addition, a Roth IRA is not subject to the required minimum distribution.  Special penalties apply to distributions from a Roth IRA before the Roth IRA has been in existence for five years and before you reach age 59 1/2.

Note: Roth IRA contributions may not be recharacterized as a contribution to a traditional IRA.  Therefore, you should be very careful when you convert a traditional IRA to a Roth IRA.  Also, contributions to an IRAs (either Traditional or Roth) in excess of the limits are subject to an annual 6% penalty. 

 COVID-19

The CARES Act provides a temporary waiver of the required minimum distribution (RMD) rules during 2020.  Individuals who already took a RMD in 2020 had until August 31, 2020, to roll the funds back into a retirement account.

Charitable contribution

The Internal Revenue Service (IRS) reminded taxpayers of a special new provision that will allow more people to easily deduct up to $300 in cash donations to qualifying charities this year.  The CARES Act, enacted last spring, including the special $300 deduction designed especially for people who choose to take the standard deduction, rather than itemizing their deductions.  Cash donations include those made by check, credit card or debit card.  This mean the taxpayers who claims Standard deductions can still claim donations up to $300 made by cash.

 

Here’s what taxpayers can do now to Get Ready to file taxes in 2021

There are steps people can take now to make sure their tax filing experience goes smoothly in 2021.

Here are a few other things people can do now:

Check their withholding and make any adjustments soon
Since most taxpayers typically only have a few pay dates left this year, checking their withholding soon is especially important. It’s even more important for those who:
• Received a smaller refund than expected after filing their 2019 taxes this year.
• Owed an unexpected tax bill last year.
• Experienced personal or financial changes that might change their tax liability.

Some people may owe an unexpected tax bill when they file their 2020 tax return next year if they didn’t have enough withheld throughout the year. To avoid this kind of surprise, taxpayers should use the Tax Withholding Estimator to perform a quick paycheck or pension income checkup.  Doing so helps taxpayers decide if they need to adjust their withholding or make estimated or additional tax payments now.