2020 Tax Changes Highlights
SECURE ACT
- The beginning age for taking required minimum distributions rises to 72 from 70½. This easing applies to account owners who turned 70½ after 2019.
- Employees who work past age 72 can delay taking RMDs from the 401(k) plan of their current employer until after they retire.
- Owners of traditional IRAs can now make contributions past the age of 70½. Repeal of the 70½ maximum age applies to contributions made for 2020 or later.
- There’s a tightening on inherited IRAs and workplace retirement accounts. Many need to be cleaned out within 10 years of the death of the IRA owner or 401(k) participant.
- Folks having a baby or adopting can take payouts from IRAs and 401(k)s of up to $5,000, without having to pay the 10% fine for pre-age-59½ withdrawals.
CARES ACT (March 2020)
- Stimulus Payments or economic impact payment (EIPs) – gave qualified single adults a one-time payment of $1,200. Married couples who filed jointly received $2,400 total ($1,200 apiece). Families received $500 payments for eligible dependent children.
- Unemployment – A program offered workers an additional $600 per week for four months, on top of what state programs pay. The deal applied to the self-employed, independent contractors, and gig economy workers.
- Waived the 10% early withdrawal penalty for distributions from retirement funds up to $100,000 for COVID-related purposes, retroactive to Jan. 1. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to roll it back over.
- 401(k) Loans – the loan limit is increased from $50,000 to $100,000.
- Required Minimum Distributions from IRAs and 401(k) plans (at age 72) are suspended.
- Charity – there is a new provision that provides a $300 above-the-line deduction for charitable contributions.
- Small Business Relief – companies with 500 employees or less can receive Payroll Protection Plan (PPP) loans. If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
- Net Operating Losses – the Tax Cuts and Jobs Act (TCJA) net operating loss rules are modified. The 80% rule is lifted, and losses can now be carried back five years.
COVID RELIEF ACT (December 2020)
- Stimulus Payments – 2nd Round (EIPs) gave single adults a one-time payment of $600. Married couples who filed jointly received $1,200 in total ($600 apiece). Families received an additional $600 for each eligible child under 17.
- Reduced medical expense deduction floor, allowing individuals to deduct out-of-pocket medical expenses that exceed 7.5% of adjusted gross income (rather than 10%).
- Tax Credit Lookback – provides a temporary provision allowing eligible taxpayers to use 2019 earned income to determine the Earned Income Tax Credit as well as the refundable Additional Child Tax Credit for 2020.
- Charitable Deductions for 2021 – Taxpayers who do not itemize:
- Single filers can deduct up to $300 of 2021 charitable contributions.
- Married file jointly, increases the amount of deductible charitable contributions from $300 to $600 for 2021.
- PPP Loans:
- Forgiven PPP loans are not included in a taxpayer’s gross income.
- Deductions are allowed for otherwise deductible expenses that are paid with funds from a forgiven PPP loan.
- Temporarily Allows Full Deduction for Business Meals: The Act provides that business expenses for food and beverages are fully deductible (rather than 50% deductible under current law) if such expenses are paid or incurred in 2021 or 2022. The full deduction applies to food and beverage expenses that are provided by a restaurant, but expressly excludes business “entertainment” expenses.
- The Act extends the increased limit for corporations under the CARES Act on deductible charitable contributions for 2021.
- The Act extends refundable payroll tax credits for paid sick and family leave.
- Expands and extends Employee Retention Tax Credit (“ERTC”) through June 30, 2021.