But regardless of whether you’ve filed your 2019 return yet, now is the time to start thinking about your 2020 return — the one due by April 2021. The sooner you learn about the credits, deductions and contribution limits available to you, the more time you will have to take advantage of them.
So, here’s a look at some ways the federal tax return you will file in 2021 will differ from your prior return:
1. Waived RMDs
The Coronavirus Aid, Relief, and Economic Security Act of 2020, better known as the CARES Act, waived required minimum distributions (RMDs) from retirement accounts for 2020.
RMDs generally count as taxable income. So, this one-time reprieve means that some retirees will have lower taxable incomes in 2020 and thus possibly owe less in federal income taxes in 2021.
To learn more about this change, check out “5 Ways the New Coronavirus Stimulus Law Will Help Your Wallet.”
2. Higher standard deductions
Standard deductions generally rise each year on account of adjustments for inflation. The IRS reports that for 2020, the standard deduction amounts for the following tax-filing statuses are:
- Married filing jointly: $24,800 — up $400 from 2019
- Married individuals filing separately: $12,400 — up $200
- Head of household: $18,650 — up $300
- Single: $12,400 — up $200
The standard deduction reduces the amount of your income that’s subject to federal taxes. So, if a single person is eligible for and chooses to take the standard deduction (as opposed to itemizing deductions) on their 2020 tax return, they would not be taxed on the first $12,400 of their income from 2020.
3. A charitable deduction available to all
Usually, you can only write off tax-deductible donations to charity on your federal tax return if you itemize your deductions rather than take the standard deduction — and the latter has become far more common since the 2018 overhaul of the federal tax code.
But in an effort to encourage Americans to donate money to charity during the coronavirus pandemic, the CARES Act enabled taxpayers to deduct up to $300 in monetary donations in 2020 — even if they take the standard deduction.
4. Higher income brackets
Income tax brackets also tend to rise annually. For 2020, the income brackets are as follows for folks whose tax-filing status is single:
- 37% tax rate: Applies to taxable income of more than $518,400
- 35%: More than $207,350 but not more than $518,400
- 32%: More than $163,300 but not more than $207,350
- 24%: More than $85,525 but not more than $163,300
- 22%: More than $40,125 but not more than $85,525
- 12%: More than $9,875 but not more than $40,125
- 10%: Income of $9,875 or less
For complete 2020 tax rate tables for all tax-filing statuses, see Pages 5-7 of IRS Revenue Procedure 2019-44. If you want to compare them with the 2019 tables, see Pages 8-10 of Internal Revenue Bulletin 2018-57.
5. Higher contribution limits for (some) retirement accounts
You can save more money in several types of workplace retirement accounts in 2020, as we detail in “These Retirement Account Limits Just Increased.”
The base contribution limit for 401(k) plans, for example, is $19,500 — up from $19,000 for 2019. The limit for catch-up contributions, which taxpayers age 50 and older can make, is an additional $6,500 — up from $6,000. So, folks who are at least 50 can contribute a total of $26,000 to a 401(k) in 2020.
Unfortunately, 2020 did not bring any contribution limit increases for individual retirement accounts (IRAs).
6. Higher contribution limits for HSAs
Workplace retirement accounts are not alone. Contribution limits for health savings accounts (HSAs) also tend to increase each year — and 2020 is no exception.
The 2020 contribution limits for folks who are eligible for an HSA and have the following types of high-deductible health insurance policies are:
- Self-only coverage: $3,550 — up from $3,500 for 2019
- Family coverage: $7,100 — up from $7,000
7. Higher income limits for the Saver’s Credit
For 2020, the Saver’s Credit, formally known as the Retirement Savings Contributions Credit, has higher income limits. That effectively makes this little-known tax credit available to more people.
You might be eligible for this credit in 2020 if your adjusted gross income, or AGI (found on your tax return), is not more than:
- Married filing jointly: $65,000 — up from $64,000 for 2019
- Head of household: $48,750 — up from $48,000
- All other tax-filing statuses: $32,500 — up from $32,000
To learn more about the Saver’s Credit, check out “This Overlooked Retirement Tax Credit Gets Better in 2020.”
8. A more valuable adoption tax credit
The tax credit for qualified adoption expenses is more valuable in 2020. The maximum allowable credit amount is $14,300 — up from $14,080 for 2019.
9. A more valuable Earned Income Tax Credit
For 2020, both the income limits and the maximum credit amount for the Earned Income Tax Credit (EITC) are higher.
You might be eligible for the EITC in 2020 if your AGI is not more than:
- Married filing jointly: $56,844 — up from $55,952 for 2019
- All other tax-filing statuses: $50,594 — up from $50,162
The maximum amount that the EITC is worth in 2020 is $6,660 — up from $6,557.
10. A higher cap on Social Security payroll taxes
One bit of bad news for some folks: The maximum amount of a worker’s income that is subject to Social Security payroll taxes rose to $137,700 for 2020 — up from $132,900 for 2019.
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