New Tax Breaks for the 2020 Tax Year

By: Stacey Nickens

The pandemic changed so much in our lives, including the tax code. The coronavirus relief laws passed by Congress included a number of tax breaks that can be applied on your 2020 return. In this article, we will review four new tax breaks you may be able to use when you file your 2020 tax return.

Recovery Rebate Credit
Individuals were eligible for two rounds of stimulus between mid 2020 and early 2021. The IRS is treating these stimulus checks as advanced payments of a refundable tax credit. On your 2020 return, you can see how the amount of stimulus you received compares to the amount of stimulus for which you were eligible.

Simply use the Recovery Rebate Credit Worksheet on Form 1040. Make sure you properly calculate how much stimulus you received. The IRS sent letters explaining the amount of your first stimulus check. While the IRS hasn’t sent letters explaining the amount of your second stimulus check, they do plan to do so. In the meantime, you can visit www.irs.gov/Account to check the payments the IRS says it has sent you.

On your Form 1040, you will calculate how much stimulus you should have received. If the amount you actually received is less than the amount you should have received, you can claim the remaining balance on line 30 of Form 1040. If the amount you received is equal to or more than the amount you should have received, you will not include anything on line 30.

Charitable Write-Offs
Even if you choose not to itemize your tax return, you can still write off $300 in charitable cash donations in addition to your standard deduction. On 2021 returns only, couples filing jointly can write off $600 in charitable cash donations. To write off a charitable cash donation, use line 10b on Form 1040.

Deferral of Self-Employment Taxes
If you are self-employed, you can defer a portion of self-employment taxes due on earnings from March 27, 2020 – December 31, 2020. You will need to pay half of the deferred taxes by December 31, 2021, and you will need to pay the other half by December 31, 2022.

You can use Part III of Schedule SE to calculate your maximum deferral. Keep in mind that opting for a self-employment tax deferral will not prevent you from taking an above-the-line SECA tax deduction.

Waived Penalty for Early Distributions
In 2020, individuals could take a coronavirus-related distribution from their 401(k) or IRA without paying the 10% fee for early withdrawals. However, you will still owe regular income tax on the distribution, which you can pay over the course of three years. You will use Form 8915-E to spread out the income tax on your distribution. Keep in mind that if you recontribute the distribution in the next three years, the distribution will be treated as a rollover.