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2020 Tax Law Changes for Individual Returns

December 03, 2020


2020 Tax Law Changes for Individual Returns
As the 2021 filing season rapidly approaches here is a reminder of the federal tax law changes that will affect individual 2020 returns.

Recovery Rebate Credit
This is a refundable credit for those who did not receive the full economic impact (stimulus) payment in 2020. This would cover the following circumstances:

  • Taxpayer and (if applicable) their spouse did not receive any economic stimulus payment
  • Economic stimulus payment was limited based on their income in 2018 or 2019
  • Taxpayer did not receive a payment for all of their eligible children

For the vast majority of taxpayers this credit will be zero since they already received their full economic stimulus payment during 2020. The credit that is calculated (based on their 2020 income, filing status and eligible children) will be reconciled with the payment they received in 2020.

The calculation of the credit is detailed on a worksheet in the Form 1040 instructions (draft as of early December) on page 57 and the result of the calculation appears on Form 1040/1040SR, line 30.

The same eligibility requirements that applied to the economic impact payments apply to this credit. Individuals must have a valid work SSN and not be claimed as a dependent on another’s return (with the exception of children under age 17).

Charitable Contributions
There are two provisions for charitable contributions as follows:

  • Charitable Contribution Deduction for Taxpayers who take Standard Deduction

    For 2020 a taxpayer who takes the standard deduction will be allowed to deduct up to $300 of cash charitable contributions as an adjustment to income on Form 1040, line 10b.

    Noncash property and contributions carried forward from prior years do not qualify for this deduction.

    This maximum deduction is $300 per return. Therefore the maximum amount is $300 regardless of filing status.

  • The 50 percent of AGI limitation for charitable contributions is suspended for 2020

Retirement Distributions Related to COVID-19

  • For qualified COVID-19 distributions, an individual can withdrawal funds (up to $100,000) from a retirement account free of the 10 percent early withdrawal penalty and can spread the taxable portion on that distribution over a three year period.
  • Any qualified COVID-19 withdrawal will not be taxable if it is recontributed within three years of the date of distribution.
  • Increases the maximum loan amount for COVID-19 purposes to $100,000.

Credits for Sick and Family Leave for certain Self-Employed Individuals
This new credit is for self-employed individuals who were affected by the coronavirus. It allows them to claim a credit similar to sick leave if they were unable to work because they had coronavirus or had to care for someone else who had coronavirus or a credit similar to family leave if they were unable to work because they had to care their child who had coronavirus. The period covered is April 1 – December 31, 2020 and the credit is claimed on new Form 7202 (draft as of early December). The calculated credit is then transferred to Form 1040, Schedule 3, line 12b.

For more information for who may take this credit and how the credit is calculated see the draft of Form 7202 instructions.

Payroll tax (social security portion) Deferral
New tax provision that permits self-employed individuals to delay paying 50% of the social security tax imposed for the period beginning March 27 and ending December 31, 2020.

Deferred tax is payable in the following two years with half paid in 2021 and half paid in 2022.

For self-employed individuals – Taxpayer can make an election to defer this tax on Schedule SE, Part III.

The actual amount of tax that can be deferred may be limited by the amount of tax that the self-employed individual paid in estimated taxes or had withheld during 2020. This calculation is done on a worksheet in the 1040 instructions (draft as of early December) for Schedule 3, line 12e on page 101.