Additional 2020 Federal Individual Tax Law Changes
January 11, 2021
Included in the 2021 Appropriations legislation that was signed into law on December 28 were the following tax law provisions that will affect 2020 federal individual returns:
Earned Income Tax Credit and Child Tax Credit Change
Individuals whose 2020 earned income is less than their 2019 earned income have the option of using the 2019 amount to calculate their 2020 Earned Income Tax Credit and/or their Child Tax Credit.
Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals
When calculating one or both of these credits on new Form 7202 the taxpayer may elect to use either their 2019 or 2020 net earnings from self-employment.
Disaster Relief Provisions
The following disaster relief provisions were made available to taxpayers that were affected by a federally declared disaster that occurred in 2020:
Deduction for Personal Casualty Losses
Uncompensated losses that occurred in a federally declared disaster area:
- Must exceed $500 in order to take a deduction
- Removes the requirement that the loss exceed 10% of AGI
- May be taken as an itemized deduction or as an increase in a taxpayer’s standard deduction.
Retirement Fund Provisions
- For qualified federal disaster 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 federal disaster relief withdrawal will not be taxable if it is recontributed within three years of the date of distribution.
- Increases the maximum loan amount for qualified federal disaster relief to $100,000.
- Allows for re-contribution of retirement plan withdrawals for cancelled home purchases or construction of a principal residence due to a federally declared disaster.
Charitable Contributions for Disaster Relief
Suspends the limitation on charitable contributions associated with a federally declared disaster that are made in 2020.
Recovery Rebate Credit – 2nd Economic Impact (Stimulus) Payments
As was the case with the 1st economic impact payment (EIP1) that was sent to individuals earlier in 2020, the 2nd economic impact payment (EIP2) is also being treated as an advance payment of the Recovery Rebate credit.
For the vast majority of taxpayers this credit will be calculated as zero since they already received their full EIP1 payment during 2020 and their full EIP2 payment in January of 2021.
This credit appears on line 30 of the 2020 Form 1040/1040SR and the credit is calculated based on a worksheet included in the 2020 1040 instructions on page 59. The credit will be calculated based on income, filing status and the number of qualifying children reported on the 2020 federal return.
The total available recovery rebate credit is:
- EIP1 - $1,200 ($2,400 for MFJ) plus $500 for each eligible dependent child under 17
- EIP2 - $600 ($1,200 for MFJ) plus $600 for each eligible dependent child under 17
Taxpayers with the following circumstances will be eligible for this credit on their 2020 federal return:
- Taxpayers who did not receive an EIP1 ($2,400 – MFJ or $1,200 for all other filing status’
- Taxpayers who did not receive an EIP2 ($1,200 – MFJ or $600 for all other filing status’
- Taxpayer did not receive a $500 (EIP1) and/or $600 (EIP2) payment for all of their eligible children
- The taxpayer’s economic stimulus payment was limited based on their income on their 2018 or 2019 return and their 2020 income is below the income phase out or income limit for the credit.