What’s new in 2020 tax?
Let’s recap 2020 deductions from adjusted gross income:
- jury duty
- 199A deduction
- capital losses
- unemployment benefits repayments
- foreign housing (limitations applies)
- unreimbursed travel expenses (National Guards and Reserve members)
- certain attorney fees
- unreimbursed employee expenses
- self-employment medical insurance
- certain moving expenses (limitations apply)
- 50% SE tax
- now you can deduct alimony and maintenance payments (comparing to 2019)
- contribution to retirement accounts and/or HSA
- higher education expenses deductions
- educator expenses
Tax brackets are:
10%, 12%, 22%, 24%, 32%, 35%, 37 %
Child unearned income is continued being taxed at
- $0 < $1,100 =0%
- $1,100 <$2,200 = the child’s tax rate
- $2,200 < at the parents’ tax rate
Community property states are AZ, CA, ID, LA, NV, NM, TX, WA, WI.
The IRS recognizes registered domestic partners in states NV, WA, and CA under community property laws.
A transfer of income by an employer is taxable to the employee, to whom it is transferred (even the employer’s gifts).
If you received a payment for services in property or some other services, you must recognize this income in fair market value.
Employer’s payment of employee’s personal expenses is an earned income to that employee. Medical expenses reimbursed by an employer, for the most part, excluded from income. Excess of the reimbursement is included in the employee’s income.
Employer’s dependent care assistance to take care of employee’s dependents is excluded from employee’s income (for the most part, limitations apply).
Employer’s education assistance payments and group term life insurance (exceptions apply to both) are generally excluded from employee’s income.
Annuity payments are excluded from income in proportion to investment in the annuity.
A discharged debt is generally included in income. Debt discharge due to insolvency is excluded from income (limitations apply).
Gifts are generally excluded from income(limitations apply). The income produced from the gift is not excluded from income.
How to compute Capital gain on the sale of a property?
The formula is:
FMV of any property received + any money received – money spent on purchasing the property + money spent on any improvements to the property – any repairs expenses & depreciation already taken and claimed on your tax return.
- Purchase amount $100
- Improvements $20
- Repairs $35
- Depreciation $40
- FMV of property received $10
- Money received $5
(10 + 5) – (100 + 20 – 35 – 40) = $30 loss
Important: there might be a depreciation recapture if the FMV of property received and money received results in a gain.
Standard deductions for 2020 are:
- Married filing jointly $24,800
- Head of household $18,650
- Single and married filing separately $12,400
The standard deduction of a taxpayer who is claimed on another taxpayer’s return as a dependent is the greater of $1,100 or earned income + $350.
Alimony and separate maintenance payments are includable in tax returns if the divorce was executed on or before December 31, 2018. Important! Some amounts might be excluded from alimony if they are considered child support.
Important! Don’t forget about alimony recapture (if applicable).
It is important to use the right tax strategy, by, putting money in a retirement account, for example.
The regular IRA contribution limit for 2020 is $6,000. Taxpayers age 50 and over are allowed to contribute an additional $1,000. The total of $7,000 is deductible and tax-deferred.
COVID-19 relief: the 10% penalty would not apply if the taxpayer has a covid-related need to take money out of the retirement earlier. The CARES Act also waives the required minimum distribution rate for the calendar year 2020.
Health Savings Accounts are “God sent miracles”. Employer contributions are excludable from employee’s income and distributions are tax-free. The account holder gets a deduction for the contributions. Health Savings Plans cover the account holder and their family member. The plan covers accidents, disability, dental & visual care, long-term care, etc.
If you own a rental property or a warehouse, and it is going to be demolished, don’t include the demolition costs as expenses. Demolition costs are capitalized and added to the basis of the land.
If the land has lost its usefulness and is abandoned (in the course of business), this loss can be claimed as an ordinary loss (not a capital loss).
Gambling losses are deducted to the extent of gambling gains for the year.
An NOL in 2020 can be carried forward indefinitely.
2020 recovery rebate. Economic impact payments that individuals received are the 2020 recovery rebates. If someone didn’t receive the economic impact payment, the rebate can be claimed on the 2020 tax return.