The coronavirus (COVID-19) pandemic has impacted almost every aspect of 2020, including taxes, says Hayden Adams, CPA, CFP®, and director of tax planning at the Schwab Center for Financial Research. Here are eight things to keep in mind as you prepare to file your 2020 taxes.
1. Income tax brackets shifted a bit
There are still seven tax rates, but the income ranges (tax brackets) for each rate have shifted slightly to account for inflation. For 2020, the following rates and income ranges apply:
|Tax rate||Income level|
|Single filers||Married couples filing jointly (and qualifying widows or widowers)|
|10%||$0 to $9,875||$0 to $19,750|
|12%||$9,876 to $$40,125||$19,751 to $80,250|
|22%||$40,126 to $85.525||$80,251 to $171,050|
|24%||$85,526 to $163,300||$171,051 to $326,600|
|32%||$163,301 to $207,350||$326,601 to $414,700|
|35%||$207,351 to $518,400||$414,701 to $622,050|
|37%||$518,401 or more||$622,051 or more|
Source: Internal Revenue Service
2. The standard deduction increased slightly
One of the biggest changes to come out of the Tax Cuts and Jobs Act (TCJA) of 2017
was the doubling of the standard deduction.
After an inflation adjustment, the 2020 standard deduction is rising by $200 to $400, depending on your filing status. The standard deduction is $12,400 for single filers and $24,800 for married filers. For single heads of household, who are generally unmarried with one or more dependents, it’s $18,650.
3. Itemized deductions remain the same
The TCJA eliminated many itemized deductions—including deductions for tax preparation fees, investment advisor fees, and unreimbursed job expenses—in favor of the higher standard deduction. In addition, some remaining itemizations were limited.
The following rules haven’t changed much for 2020, but are still worth pointing out.
- State and local taxes: The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
- Mortgage interest deduction: The mortgage interest deduction is limited to $750,000 of indebtedness. But people who had $1,000,000 of home mortgage debt before December 16, 2017, will still be able to deduct the interest on that loan.
- Medical expenses: Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2020.
- Charitable donations: Under the CARES Act, the cash donation limit is temporarily increased to 100% of AGI.
- Miscellaneous deductions: No miscellaneous itemized deductions are allowed.
4. IRA contribution limits remain the same, but 401(k) limits increased a bit
The traditional IRA and Roth contribution limits in 2020 remain the same as in 2019. Individuals can contribute up to $6,000 to an IRA and those age 50 and older also qualify to make an additional $1,000 catch-up contribution. If you’re able to max your IRA, consider doing so—you may qualify to deduct some or all of your contribution.
The contribution limits for 401(k) accounts for 2020 is $19,500. If you're age 50 or older you also qualify to make an additional $6,500 catch-up contribution.
5. You can save a bit more in your health savings account (HSA)
For 2020, the max you can contribute into an HSA is $3,550 for an individual (up $50 from 2019) and $7,100 for a family (up $100). People age 55 and older can contribute an extra $1,000 catch-up contribution.
To be eligible for an HSA, you must be enrolled in a high-deductible health plan (which usually has lower premiums as well). Learn more about the benefits of an HSA.
6. You may qualify for the child tax credit
The TCJA increased the child tax credit and made it available to people with higher incomes. In 2020, you may be eligible for a tax credit of up to $2,000 per dependent child age 16 and younger, if your household income is below $200,000 for single filers or $400,000 for joint filers. The child tax credit can even be refundable (up to $1,400), meaning it can be paid to you as a refund if it’s more than the amount of your tax bill.
If your dependent does not qualify for the child tax credit, you may still qualify for up to $500 of tax credits under the “credit for other dependents” (see IRS Publication 972 for more details). Tax credits, which reduce the tax you owe dollar for dollar, are generally better than deductions, which reduce your taxable income.
7. The alternative minimum tax (AMT) exemption went up
The TCJA greatly reduced the number of taxpayers subject to the AMT, which now mostly affects households with incomes over $500,000, according to the Tax Policy Center. Still, the AMT has investment implications for some high earners.
For 2020, the AMT exemptions are $72,900 for single filers, $113,400 for married taxpayers filing jointly, and $56,700 for married taxpayers filing separately. The phase-out thresholds are
$1,036,800 for married taxpayers filing a joint return and $518,400 for all other taxpayers.
8. The estate tax exemption is even higher
The estate and gift tax exemption, which is indexed to inflation, rises to $11.58 million for 2020. But the now-higher exemption is set to expire at the end of 2025, meaning it could be essentially cut in half at that time if Congress doesn’t act.
The annual gift exclusion, which allows you to give money to your loved ones each year without incurring any tax liability or using up any of your lifetime estate and gift tax exemption, stays at $15,000 per recipient.