As all of us are dealing with the challenges of a global pandemic, income taxes may be the last thought on your mind. As finances are tight, taking advantage of every deduction is more critical than ever. The following are some 2020 end of year tax updates and some planning advice. Please call us with specific questions or to schedule a tax consulting meeting.
2020 Standard Deduction
Standard Deduction amounts have increased $200 to $400 depending on your filing status. Approximately 85% of taxpayers are using the standard deduction rather than itemizing. We still recommend tracking all receipts since we often cannot determine if you will have enough deductions to itemize until late in the tax year.
2020 Tax Brackets
|Tax Rate||Single||Head of Household||Married- Joint||Married- Separately|
|10%||$0 to $9,875||$0 to $14,100||$0 to $19,750||$0 to $9,875|
|12%||$9,876 to $40,125||$14,101 to $53,700||$19,751 to $80,250||$9,876 to $40,125|
|22%||$40,126 to $85,525||$53,701 to $85,500||$80,251 to $171,050||$40,126 to $85,525|
|24%||$85,526 to $163,300||$85,501 to $163,300||$171,051 to $326,600||$85,526 to $163,300|
|32%||$163,301 to $207,350||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350|
|35%||$207,351 to $518,400||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $311,025|
|37%||$518,401 or more||$622,051 or more|
Expanded Use of 529 funds
Starting in 2020, 529 College Savings funds can now be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, $10,000 of 529 Funds may be withdrawn to pay off student loans (per beneficiary in a lifetime, not annually). Additionally, there is a 20% credit on 529 contribution up to $5,000 that can be used to reduce Indiana state income taxes.
Solar Credits/Geothermal Heat Pumps
The solar credit for residential housing has decreased to 26% in 2020, down from 30% in 2019. The solar credit for residential housing will end in 2021 and will be decreased to 22%. Tax breaks for geothermal heat pumps, residential wind turbines and fuel cell property will mimic the solar credits, ending in 2021.
2020 Long Term Care Premium Deductions
Federal: The increased maximum amounts of qualified long-term care premiums includible as medical expenses on Form 1040, Schedule A, Itemized Deductions or in the self-employed health insurance deduction range from $430 for ages 40 and under to $5,430 for those 71 years of age and older.
Indiana: If you have a Partnership LTC policy, any premium paid may be taken as a deduction on Form IT-40, Schedule A, under other deductions, Code 608.
Filing & Payment Penalties
The IRS has been aggressively enforcing penalties as a means to generate operating capital.
The failure-to-pay penalty is charged for failing to pay your tax by the due date. The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%.
The failure-to-file penalty is charged on returns filed after the due date or extended due date. The failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes.
- If after five months you still haven’t paid, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25%.
- The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax.
Failure to file and late payment penalties may be waived upon the showing of reasonable cause.
Interest is charged per the Statute and is not waivable. Interest accrues on the unpaid balance and compounds daily from the due date of the return (without regard to any extension of time to file) until you pay the balance in full. The interest rate for taxpayers other than corporations is the federal short-term rate plus 3%.
Lifetime Estate and Gift Tax Exemption in 2020
The IRS has raised the gift tax exemption from $11,400,000 to $11,580,000 for individuals and from $22,800,000 to $23,160,000 for couples. (I know, I know you are a couple dollars short like I am so these new limits really help all of us!). These new limits assist us with simplifying many estates that had to previously use multiple trusts to avoid estate taxes when the lifetime exemptions were substantially lower.
Estate planning is more than reducing or avoiding estate and gift taxes. There are many directives that should be considered to assist family members and friends with their health and financial matters. As many of us are reflecting on our own and others health, we believe it is prudent to review your current estate planning for necessary updates or to put into place estate planning that has not been addressed.
The Pittman Legal & Tax Advisors Team is here to help you all year long and during tax seasons. Please call us at 317-636-5561 with specific questions or to schedule a tax consulting meeting.