Income Tax Changes Since 2019 – One Year: What a Difference!
It’s amazing what can change in a year’s time! Significant changes to income tax code for individuals were made within the past year, even before the COVID-19 outbreak. Here is a reminder of those important changes and how they might affect you:
Charitable Donations
$300 of cash donations to charity are deductible “above the line” regardless of whether you itemize deductions.
A cash charitable contribution is deductible against 100% of your Adjusted Gross Income (“below the line”).
Donation made directly to charity from an IRA is still allowed for those who are 70-1/2 or older up to the limit of $100,000.
Required Minimum Distributions
Required Minimum Distributions (RMD) are waived for 2020. This means that Qualified Charitable Distributions will not have an immediate income tax effect in 2020 but will in future years as the RMD is reduced.
The IRS has not yet addressed the impact on RMD from inherited IRAs that was radically changed with the SECURE Act in December of 2019.
RMDs for 2021 will be increased to the extent that the RMD was not withdrawn in 2020. You could take the tax savings from not taking the RMD in 2020 and use it for the tax due on a Roth conversion.
Early Withdrawal Penalties
The 10% early withdrawal from an IRA penalty if you are under the age of 59-1/2 is waived in 2020 if you, your spouse or a dependent is diagnosed with COVID-19 or if you experience “adverse financial consequences” as a result of the pandemic.
The withdrawal will be taxable unless it is repaid, such repayment can be spread out over three years.
The withdrawal is limited to $100,000.
Tax Rebates
The rebates, designated as credits under the CARES Act, will not be counted as income in 2020. The rebate, up to $1,200, is based on your Adjusted Gross Income (AGI) for 2019, or if you have not yet filed your AGI for 2018.
When your 2020 tax return is filed you will need to reconcile the rebate you received with the rebate you qualify for and if you received less than you qualify for then you can claim that in your 2020 return. If you received more than you were due, you do not need to repay the excess.
Child Taxpayers
The tax rate for taxpayers under the age of 18 (and students up to age 24) is reduced from the compressed estates and trust tax schedule to their tax schedule or the tax schedule used by their parents, whichever is higher. This is retroactive to 2018 and 2019.