The Ins and Outs of 2020’s Tax Updates – What You Need to Know Before You File
I think we can all agree 2020 was one for the books — especially our financial books.
With so many legislative changes impacting tax laws, it can feel overwhelming to make sense of your 2020 tax situation. From the stimulus payments to IRA distributions, we are breaking down some of the important tax updates you need to have on your radar before you file your 2020 taxes.
2020 Tax Deadline Extension
The first thing you need to know is the 2020 tax deadline has been extended. After the American Rescue Plan was passed in early March, the IRS extended the 2020 tax filing deadline to May 17, 2021. Keep in mind, this is only for filing your income taxes. If you are an independent contractor or business owner, 2021 quarter one taxes are still due on Thursday, April 15th.
Late Fees and Extensions
It’s important to make sure to get your taxes filed on time to avoid late filing fees. The IRS has also made a few changes regarding the late filing fees. The fine for filing late returns is higher for returns with post-2019 due dates. The minimum penalty for returns filed 60 or more days after the due date is now the lesser of $435 (up from $215) or 100% of the required tax shown on the return.
If you do need extra time to gather your tax documents, the IRS usually grants them but an extension (form 4868) needs to be filed before the extended tax deadline (May 17th) to avoid a late fee.
It’s important to note that an extension only buys you extra time to file your tax documents. The extension does not allow you extra time to pay any taxes to the IRS that you may owe. If you believe you will owe taxes for 2020, you must estimate the amount and make the payment by the filing deadline.
If you do not owe tax, the extension request process is pretty straightforward. If you do owe tax, the taxes must still must be paid by the deadline. The extension is simply just extra time to get your paperwork together.
If you have any questions about late filing fees, extensions, or estimating tax payments we are happy to assist with this.
The SECURE Act
The SECURE Act was signed into law on December 20, 2019, and went into effect starting January 1, 2020.
Some key elements of the SECURE Act include:
The beginning age for taking required minimum distributions rose from 70 ½ to 72 (only applies to account owners who turn 70 ½ after 2019)
Starting in 2020, allows owners of traditional IRAs to make contributions past the age of 70 ½
Taxpayers having a baby or adopting a child can now take payouts from IRAs and 401Ks of up to $5,000 without having to pay the 10% fine for pre-age-50 ½ withdrawals.
Fellowships, stipends or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA Contributions
If any of these scenarios apply to you, be sure to let your CPA know so that you can take advantages of all the tax credits available and max out your return.
The economic impact of COVID-19 has been monumental and the CARES Act was the first legislative bill passed to provide relief related to COVID-19. It was signed into law on March 27, 2020, and brought the first round of stimulus payments. It also allowed some ways to borrow or take distributions from retirement funds if they were facing financial hardship due to the pandemic. Keep in mind, these are not tax-free distributions.
The main benefit was to allow individuals under the age of 59 ½ (typical penalty-free retirement age) to take an early distribution without the 10% penalty. If you did withdraw funds from your retirement account and were impacted financially due to COVID-19, it’s important to discuss this with your CPA. When you receive your 1099-R, it will likely be coded as an early distribution so your tax preparer will need to have more details about what was going on in your family situation during the pandemic.
Stimulus payments have been a hot topic and also a very big relief to many individuals and families this year. We recognize it has been a little confusing depending on your personal situation.
The first $1200 stimulus payment from Spring 2020 was essentially an advanced refundable tax credit for 2020 taxes. This means that you get to keep all the money you received with no taxes due on it regardless of your taxes due or refund for 2020.
Since your stimulus payment was based on either your 2018 or 2019 annual gross income (AGI) but applies to your 2020 AGI, there has been a little confusion on whether you will have to pay back the money or get more money, depending on your 2020 AGI.
I’m going to try to break it down as easily as possible here:
If your 2018 or 2019 AGI was LOWER than your 2020 AGI and resulted in a higher stimulus check than you think you should have received (over $75k for single; $150k for married filing jointly) then you will be able to KEEP the overpayment.
If your 2018 or 2019 AGI was HIGHER than your 2020 AGI and resulted in a LOWER (or no) payment than you should have received, then you will be credited the difference (or all) of the stimulus payment in your 2020 tax return.
Another common concern for single parents is how to get the $600 credit for a child who was not on their 2018/2019 return but IS for 2020. As long as you can legally claim a child on your 2020 return, you will receive a $600 credit.
If you are a business owner and either receive 1099s from services you provide or have to provide 1099s for subcontractors you work with, this is a section you’ll want to pay close attention to.
There was a significant change to the 1099 forms in 2020. If you are familiar with the 1099 world you have likely seen the 1099 miscellaneous. In box seven is where it said “non-employee compensation.” This form still exists, but the IRS decided it would be simpler to create a form called 1099-NEC (standing for non-employee compensation). It’s important to note if you were distributing 1099s to contractors in January that you used the new form.
Over the last few years, the IRS has started to ask questions about virtual currency, and this year they are expanding the question to say, “Do you have any interest in virtual currency?” They are basically casting a broader net in order to better understand taxpayers’ relationship and involvement with virtual currency.
Virtual currency is most commonly known as Bitcoin but there are several other variations of virtual currency such as cash apps and it is also used in gaming. If you or a member of your household are participating in the virtual currency marketplace it’s very important to communicate this to your CPA. Virtual currency must be reported to the IRS as taxable income, similar to stocks and bonds.
Unemployment Tax Break
Countless Americans were forced to file unemployment claims at some point during 2020. The American Rescue Plan introduced another significant change to 2020 taxes by making the first $10,200 of unemployment benefits not taxable. This is a significant help for many Americans who have already faced many setbacks in 2020.
If this tax change applies to you or someone in your household and you already submitted your 2020 taxes before the American Rescue Plan was passed, the IRS has announced there is no need to amend your return. It will take time to figure out but the IRS will automatically refund any unemployment tax that was already accounted for.
Ready to file?
All these tax changes can feel incredibly overwhelming, especially after such a stressful year and the continuing pandemic. However, there are many benefits to these tax changes and I want to help you save as much money as possible. Please know Monarch CPA is here to support you and answer any questions you may have. Ready to get your return started? Contact me today to ensure we get your taxes filed before the deadline.