With the window of opportunity ending on December 31, 2020, once again we are faced with last minute decision-making. This year, however, is truly unlike any other. In 2020, tax allowances and bending of tax requirements emerged on the national scene narrowly directed toward minimizing the financial impact of the pandemic. In addition to these time-limited tax modifications, court closures impacted on individuals and couples in many ways. Divorcing couples were not granted their day in court, resulting in an extension of their entitlement to file joint tax returns—a result that may or may not be greeted with applause.
This article intends to raise questions and supply information that may be applicable to your end of the year planning for 2020 tax filings.
The standard deduction for married couples filing jointly has been increased by $400 to $24,400.
For those who do not itemize and therefore have not been eligible to claim a charitable deduction, in 2020 they are allowed to take a $300 deduction on their tax return.
Individuals are allowed to withdraw up to $100,000 from retirement plans during 2020, without penalty, and with the opportunity to re-invest the money in retirement accounts within three years without paying taxes on the withdrawal.
For retirement withdrawals that you do not repay, you are allowed up to three years to pay the taxes.
Individuals who elect to borrow money from their 401k plans can now borrow up to $100,000 in vested funds, an increase of $50,000.
Individuals need to check on their income eligibility for tax credits such as Lifetime Learning Credit for postsecondary education expenses. (Also check on American Opportunity Tax Credit and deductions, not credits, for tuition and fees and loan interest—all limited by income eligibility requirements)
If you had to work from home in 2020 due to Covid-19, check to see if you are eligible for tax credits.
With high deductible health insurance plans, family limits for Health Savings Accounts are $7,100/year with an extra $1,000 if you are 55 or older. This may be a good time to put more money into your HSA, thereby lowering your taxable income while building up a reserve for health expenses. Remember moneys left in HSA(s) convert to retirement savings at age 65.
Required Minimum Distributions are not required in 2020 for any one regardless of age. In addition, the RMD age has been increased from 70.5 to 72.
Decisions related to filing status for 2020 are not always obvious. For example, for couples that thought they would be divorced in 2020 and find themselves still married, also find that they are entitled to file a joint return. These couples have the unique opportunity to create a win-win situation. The best advice is to think of the total taxes owed by the family under a variety of tax options depending upon your eligibility. For example, (a) for couples who have been separated at least 6 months and have children living with one spouse, the parent with whom the children have a primary residence is eligible to file under head of household status with the other spouse filing married filing separately tax status or (b) for couples with joint physical custody of at least 2 children, each spouse may qualify to file under head of household status or (c) each spouse may choose to file under married filing separately tax status or (d) the couple may file jointly.If the couple is able to focus on the best outcome for the family, namely least total taxes paid, they should be able to agree to file under whichever option is most tax advantageous and, in addition, to balance the tax liability/refund so that neither spouse is negatively impacted.
Centre for Mediation and Dispute Resolution strongly recommends that individuals and couples seek qualified tax advice to maximize the unique aspects of 2020 tax law.