When you file your 2020 tax return, you may be in line for a pleasant tax surprise, thanks to the latest tax legislation.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created several new tax-saving opportunities for 2020. For individuals, the changes will be reflected on the return you must file by May 17.
Here’s a roundup of five new tax savers you might have a chance to use.
- Reward yourself for donations. Prior to 2020, you could write off charitable donations on your tax return only if you itemized deductions. Those folks who claimed the standard deduction got no tax benefit for their generosity. But the CARES Act allows nonitemizers to deduct up to $300 of their 2020 cash contributions to public charities. The Consolidated Appropriations Act (CAA) extends this above-the-line deduction to 2021 and doubles the maximum to $600 for joint filers.
- Reap charitable deduction bonanza. The Cares Act also gives a big boost to itemizers who make cash donations to charity. The Tax Cuts and Jobs Act (TCJA) bumped it up to 60% for 2021-2025. Then the CARES Act increased this limit to 100% of AGI for 2020. In other words, you may be able to offset your entire taxable income! The CAA extends the 100%-of-AGI limit to 2021.
- Collect your rightful EIPs. Uncle Sam handed out two economic impact payments (EIPs) in 2020, subject to phase-outs. The first round authorized by the CARES Act featured a maximum payment of $1,200 plus $500 for each qualified child under age 17. Then the CAA granted EIP’s of $600 for each individual and qualified child. The EIP’s are tax free to recipients. If you didn’t receive the full EIP you’re entitled to, you can recoup the difference by claiming a recovery rebate credit on your 2020 return.
- Avoid RMD liability. Normally, taxpayers who have reached their required beginning date (RBD) must take required minimum distributions (RMDs) from qualified plans and IRAs each year. The RMDs are based on life expectancy tables and account balances as of December 31 of the prior year. But the CARES Act suspended the RMD rules for 2020. So you can dodge this tax bullet on your 2020 return if you didn’t take any RMDs last year.
- Max out net operating losses. Back in the day, a business could carry back a net operating loss (NOL) for two years and then forward for up to 20 years. The TCJA repealed the two-year carryback rule (except for qualified farms and insurance companies) while allowing indefinite carryforwards. In addition, a NOL carryover could only offset up to 80% of taxable income in the carryover year. The CARES Act allows a five-year carryback for NOLs that arose in tax years beginning in 2018, 2019 or 2020. The CARES Act also suspends the 80% deduction limit for NOL carryovers into tax years.
Small Business Tax Strategies