Critter Corner: What Tax Changes Should I Be Aware of Before I File?

Dear Oakley,

I’m getting ready to file my taxes for 2020. I know that last year was different than most years in many ways, including getting stimulus checks from the government. Is there anything I should know before I file my taxes?

Thanks,

Chan Jess

Dear Chan,

Tax season has officially kicked off, and there are some changes you should definitely be aware of that impact your 2020 taxes! Here are some of the key tax changes you should know as you file your taxes this year:

The standard deduction increased: Some people itemize their taxes, meaning they claim certain individual tax deductions and write off the total amount from their taxable income. However, you only itemize if your individual tax deductions exceed the standard deduction.

Most taxpayers qualify to take the standard deduction. For tax year 2020, the standard deduction was increased to $12,400 for single filers and married filing separately, $24,800 for married filing jointly and $18,650 for head of household, allowing you to reduce your taxable income by a bit more than you did in 2019.

Contribution limits for health savings accounts increased: Certain health savings accounts have caps on how much you can contribute each year. Those maximums increase over time, and last year, they did. And, if you didn’t max out your contributions in 2020, you have until April 15 of this year to do so! You can contribute up to $3,550 for yourself, or $7,100 for families for tax year 2020 (those ​limits were previously $3,500 and $7,000, respectively). The annual “catch-up” contribution amount for individuals age 55 or older will remain at $1,000.

A new tax credit for stimulus payments was created: Millions of Americans received a stimulus check in 2020 as part of the coronavirus relief package. That money was actually a tax credit for 2020, paid out in advance. That’s why stimulus payments are not taxable ― they’re credits that reduce your taxable income for the year.

A new charitable contribution deduction was added: Usually, you can only write-off donations to charity on your taxes if you itemize. However, in order to encourage charitable giving during the pandemic, a new provision under the CARES Act allows taxpayers who take the standard deduction to deduct up to $300 in donations. This deduction is available for 2020 only and only applies to cash donations, including checks and online payments. Donations in the form of clothes, furniture, supplies and other items don’t count.

Penalties for retirement early withdrawals were suspended: Usually, you aren’t allowed to take money out of your 401(k) or other retirement account before you reach age 59 1/2, otherwise you’re subject to taxes and other penalties. However, another change that resulted from the CARES Act was the elimination of the 10% early withdrawal penalty on up to $100,000 in retirement funds withdrawn if you are a qualified individual impacted by coronavirus. Additionally, instead of having to pay taxes on those withdrawals in 2021, you are allowed to spread the tax payments out over three years.

There are many more tax deductions and credits available to certain taxpayers who were impacted by the coronavirus in 2020. If you lost your job, for instance, had to care for a sick loved one (or yourself), became self-employed or experienced some other change to your financial situation, it’s a good idea to talk with a tax professional about what assistance may be available when you file.

Hope this helps,

Oakley

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