1. You get a $300 charitable deduction, even if you don't itemize
The CARES Act provided an incentive to help those in greater need during the coronavirus health and economic crisis.
Thanks to the law, it's easier to get a tax break if you donated money to charity during 2020. Good tax software can help you take advantage of this special write-off.
Normally, you can deduct charitable gifts only if you itemize deductions — and the vast majority of taxpayers no longer do that. But for the 2020 tax year, the IRS allows you to write off up to $300 in cash contributions to charity, even if you take the standard deduction.
Just make sure the money was given to a qualified charitable organization.
2. There's no tax increase to worry about
First, the good news: Tax rates haven’t gone up for the 2020 tax year.
But income tax brackets typically rise every year due to inflation. The brackets have been raised slightly, so you could find yourself paying more taxes even if your income didn’t change last year.
Here are the new brackets for those filing as a single person, under the progressive, or graduated, U.S. tax system:
- The first $9,875 of income (or less) is taxed at 10%.
- Income amounts greater than $9,875 but not more than $40,125 are taxed at 12%.
- Income amounts greater than $40,125 but not more than $85,525 are taxed at 22%.
- Income amounts greater than $85,525 but not more than $163,300 are taxed at 24%.
- Income amounts greater than $163,300 but not more than $207,350 are taxed at 32%.
- Income amounts greater than $207,350 but not more than $518,400 are taxed at 35%.
- Any income over $518,400 is taxed at 37%.
One way to drop back into a lower tax bracket is by opening a health savings account to pay medical expenses, because HSA contributions lower your taxable income. You qualify for an HSA if you're in a high-deductible health plan. To find one, shop around and compare your health insurance options.
3. You won't pay tax if your boss helped with your student loans
Americans are on the hook for more than $1.7 trillion in student debt, according to the Federal Reserve. Even though payments and interest are still on a long pandemic pause — at least for federal student loans — the government decided that delaying the problem wasn’t enough.
The CARES Act allowed employers to voluntarily pay up to $5,250 of a worker’s college loan during 2020.
Both employers and employees were able to avoid federal payroll taxes on that money. And if your boss helped with your student loan debt, you don’t have to pay federal income tax on that relief when you file your 2020 taxes.
Note that if your college debt seems insurmountable, now might be the right time to refinance your student loan. Interest rates have been at record lows, so you can easily switch to a better student loan and save a mountain of money over the coming years.
4. Retirees needn't worry about RMDs
Once your reach age 72, the IRS says you must start making annual withdrawals from tax-advantaged retirement accounts, including traditional IRAs and 401(k)s. Those required minimum distributions, or RMDs, count as fully taxable income; the withdrawals help ensure that people don’t use retirement accounts to avoid taxes.
But the CARES Act suspended the mandatory withdrawals for 2020 to help retirement savers recover from the sharp stock market downturns seen last spring, when the virus first started hammering away at the U.S. economy.
If you’re a retiree who didn't need the extra "income" from taking withdrawals last year, you could forgo the RMDs — essentially giving yourself a tax break.
Now sure how much to withdraw from your retirement fund in 2021, with RMDs now on again? Today, certified financial planners are available online to provide expert advice and guide you through a personalized plan to make the best choices for your savings.
5. The bar got raised again on itemizing deductions
When you pay taxes, you can either take the standard deduction to reduce your tax bill or itemize your deductions if they’ll add up to more savings than the standard deduction.
According to various estimates, as many as 90% of U.S. taxpayers now use the standard deduction.
Like income brackets, standard deduction amounts rise each year to adjust for inflation. For the 2020 tax year, these are the increased standard deduction amounts:
- Single: $12,400, up $200 from the previous year.
- Married filing jointly: $24,800, up $400.
- Married filing separately: $12,400, up $200.
- Head of household: $18,650, up $300.
Itemizing might still work if you had a lot of deductible expenses last year. For example, if you bought a house in 2020, you can deduct the mortgage interest (within limits) and any of the fees called "points" that you may have paid to score a lower mortgage rate.