1. Simplified charitable deductions
As Americans have endured the coronavirus health and economic crisis, the CARES Act has provided an incentive to help those in greater need.
The law makes it easier to get a tax break for charitable donations made during 2020.
Normally, you can deduct charitable gifts only if you itemize deductions, which the vast majority of taxpayers don’t do. But for the 2020 tax year, the IRS will allow 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. Retirees needn't worry about RMDs
Once your reach age 72, the IRS says you must start withdrawing money annually from tax-advantaged retirement accounts, including traditional IRAs and 401(k)s. These 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 during the spring, when the virus first started hammering away at the U.S. economy.
If you’re a retiree who doesn’t need the extra “income” this year, you can forgo the withdrawal, essentially giving yourself a tax break.
Now sure how much to withdraw from your retirement fund in 2021, when RMDs start up 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.
3. Raised income brackets
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 next year even if your income didn’t change.
Here are the new brackets for those filing as a single person, under the U.S.’ progressive, or graduated, 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%.
Visit the IRS website for more details on 2020 tax brackets.
4. Higher standard 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 use the standard deduction.
Like income brackets, standard deductions rise each year to adjust for inflation.
For the 2020 tax year, these are the standard deduction amounts:
- Single: $12,400, up $200.
- Married filing jointly: $24,800, up $400.
- Married filing separately: $12,400, up $200.
- Head of household: $18,650, up $300.
Think you might save more money by itemizing? It doesn’t have to be a hassle if you use free tax software from a company like H&R Block.
5. Health savings account (HSA) limits increased
Health obviously became a front-and-center issue for Americans in 2020. With a health savings account, you can avoid income taxes on your contributions today and on the money you withdraw for your medical needs in the future — pretty slick.
You can contribute to a tax-free HSA so long as your health insurance is considered a high-deductible plan.
But there are rules on how much money you can save in your HSA every year.
For 2020, those limits have gone up by $50, to $3,550, for self-only coverage; and by $100, to $7,100, for family coverage.
If you’re one of the millions out of work and suddenly without health care, you may be eligible for Medicaid, or you might sign up for a subsidized policy under the Affordable Care Act (Obamacare).
You also can use a free online service to quickly compare health insurance quotes and coverage from multiple insurers, to find the best deal.
6. Higher income limits for the saver’s credit
The saver’s credit helps low- and medium-income taxpayers save for retirement by providing a tidy tax credit when you contribute to retirement accounts including 401(k)s and IRAs.
Yet many Americans don’t even know about it. According to a survey from the Transamerica Center for Retirement Studies, only 38% of U.S. workers were aware of the tax break.
So, what’s new with the saver’s credit? As in previous years, the IRS increased the income limit for 2020, making the tax credit available to even more people. The new limits are:
- Married filing jointly: $65,000, up $1,000.
- Head of household: $48,750, up $750.
- All other tax-filing statuses: $32,500, up $500.
And if a bipartisan bill known as the Secure Act 2.0 passes in 2021, the saver’s credit will get even better. Lawmakers want to raise the maximum annual credit from $1,000 to $1,500.
7. No 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 were paused in 2020 — at least for federal 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 the money, and the employees won’t have to pay federal income tax on the amount when they file their taxes next year.
If your college debt seems insurmountable, now might be the right time to refinance your student loan. With interest rates stunningly low, you can easily switch to a better loan and save a mountain of money over the coming years.