By Barbara O’Neill, Ph.D., CFP®, email@example.com.
Tax preparation is a frequent topic of financial education briefings and counseling sessions with Service members during the first four months of each year. Discussions often include topics such as changes in income tax laws and forms, rules regarding tax credits and deductions, adequate tax withholding, and good uses for a tax refund.
Tax year 2020 brought several tax law changes, changes in tax forms, and changes in household incomes and expenses as a result of COVID-19.
Here are 10 tax season tips to pass on to service members and their families:
New Line for Charitable Donation
Remember that cash donations of up to $300 to qualifying charitable organizations are now deductible if they were made before December 31, 2020. The $300 tax deduction is available to the almost 90% of U.S. taxpayers who elect to take the standard deduction instead of itemizing.
New Line for Recovery Rebate Credit (Stimulus)
Check IRS Form 1040. If 2020 taxable income was less than 2018 or 2019 income (whichever year was used for a 2020 stimulus payout), taxpayers may receive a larger credit. If the reverse happened, they do not need to repay any of the “excess” amounts they received.
Possible Tax-Savings Techniques
Try calculations for tax breaks that were not possible in earlier tax years because families had “too much income.” Many people experienced an income drop in 2020 due to COVID-19. Tax-saving opportunities include the earned income tax credit (EITC) and retirement saver’s credit.
New Cryptocurrency Question
Look for the question “At any time during 2020 did you receive, sell, send, exchange, or otherwise have a financial interest in any virtual currency?” on the front page of Form 1040, just beneath a taxpayer’s name and address. The IRS is trying to capture income earned from virtual currencies.
Floor for Medical Expense Deductions
Calculate the floor for deductible unreimbursed (by health insurance) medical expenses at 7.5% of adjusted gross income (AGI) for 2020 tax returns. Some state income tax systems have a lower AGI limit so tally up receipts for medical expenses and premium payments.
Possible New State Income Taxes
Be aware that tax experts have warned those who worked remotely or decamped to another state during the pandemic may owe taxes to that second state. The amount owed depends on the tax rules of the states in question and whether there are any reciprocity agreements between them.
Same SALT Cap
Recall that there is no inflation indexing for the $10,000 cap on state income taxes and local property taxes (SALT). This cap began in 2018 and is in effect through 2025 under the Tax Cuts and Jobs Act (TCJA). Also, under the TCJA, personal exemptions continue to be eliminated through 2025.
Individual Retirement Account (IRA) Deposits
Remember that IRA contributions for the 2020 tax year can be made until the tax filing deadline of April 15, 2021. Ditto for prior-year simplified employee pension (SEP) contributions for self-employed individuals.
2020 Income Tax Refunds
Consider the fact that refunds only occur when people earn an income and over-withhold for taxes. Families with an unemployed worker or foregone side hustle income in 2020 may get less money back than prior years depending on individual tax variables such as tax credits and unearned income.
2021 Income Tax Withholding
Use 2020 income, the best estimate of 2021 income, and the IRS Tax Withholding Estimator tool and/or a W-4 Form worksheet to help determine how much money to deduct from pay for taxes. Send the IRS quarterly estimated payments to cover freelance income or investment earnings.
For additional information about 2020 tax season rules, review the 2020 Tax Guide published by TIAA.