Standard Deduction and Personal Exemption
Standard deductions increase slightly from 2019 as follows:
Single = $12,400
Married Filing Joint = $24,800
Head of Household = $18,650
Medical Expense Deduction
The AGI threshold for 2020 has decreased from 10% to 7.5%. Therefore, any out of pocket medical expenses you incur above 7.5% of your AGI (and you exceed the standard deduction amount) can be deducted.
Charitable Contributions
More donations to charity can be deducted for 2020 under the CARES Act. The 60%-of-AGI limit on deductions for CASH donations by individuals who itemize is suspended. You must itemize on Schedule A and does not include excess charitable contributions from prior years.
NEW for 2020: Taxpayers who do no itemize can deduct up to $300 of charitable CASH contributions “above-the-line” on their tax return for contributions made in 2020. Single and Married taxpayers max out at $300 due to a per tax return $300 limit.
Child Tax Credit
This tax credit remains the same at $2,000 for each dependent under age 17, with up to $1,400 refundable to lower-income taxpayers. The credit phaseout thresholds are much higher, so more higher-income taxpayers will now qualify to take this credit.
A credit of $500 is still available for each dependent who is not a qualifying child (ex., disabled parents, grandparents and adult children)
Capital Gains
1. Short-term capital gains are still taxed as ordinary income for investments held less than one year. Since the tax brackets applied to ordinary income since 2018 have changed significantly, your short-term gains are likely taxed at a different rate than they formerly were.
2. Long-term capital gains tax rate income thresholds are similar to where they would have been under the old tax law (0%, 15% or 20%) depending on filing status and income level.
3. The 3.8% net investment income tax (Medicare surtax) that applied to high earners remains the same and with the exact same income thresholds.
Businesses
1. The C-Corporation tax rate remains at a flat 21%.
2. Pass through companies (S-Corporations, Partnerships, LLCs and sole proprietors) still receive a 20% deduction of qualified business income. This change is complex and does have certain restrictions for service-type companies (law, accounting, health and financial services), so please contact me if you have specific questions.
3. 100% Bonus Depreciation for the purchase of certain assets that are put into use during the tax year. This deduction is temporary and will last until 2022.
There are many more small changes to both business and individual taxes, but this blog was intended to educate you on the major changes that effect the majority of taxpayers. If you have any specific examples or items you would like to discuss, please contact me!