I’m Tara Fisher, Becker’s resident tax expert. Tax season is upon us, so I’ve compiled some helpful reminders for individual taxpayers when preparing Form 1040 for tax year 2020. Let’s dive in!
1. COVID-19 Tax Relief
There were several taxpayer relief measures that occurred in 2020. Here is a list of considerations to keep in mind when completing individual returns.
A. Economic Impact Payments and Recovery Rebate Credit: The Recovery Rebate Credit was paid out to eligible individuals in two rounds of advance payments called Economic Impact Payments. The Economic Impact Payments were based on 2018 or 2019 tax year information and are not taxable for federal income tax purposes.
If the taxpayer didn’t receive the full amount of the Recovery Rebate Credit as Economic Impact Payments, they may be able to claim the Recovery Rebate Credit on their 2020 Form 1040. The Recovery Rebate Credit is computed in the same manner as 2019, but 2020 information should be used for determining eligibility and the amount of the credit.
The first round of Economic Impact Payments (EIP 1) was sent out beginning in April 2020, and the second round of Economic Impact Payments (EIP 2) was sent out beginning in late December 2020. Taxpayers may have received one or both payments.
The taxpayer should have received a Notice 1444 from the IRS that shows how much EIP 1 was issued and a Notice 1444-B that shows how much EIP 2 was issued. If the taxpayer hasn’t received Notice 1444 or Notice 1444-B, they can also go to IRS.gov/Account for the amounts.
B. Earned Income Tax Credit (EIC) and Additional Child Tax Credit: The EIC is a credit for certain people who work. The credit may result in a refund even if the taxpayer doesn’t owe any tax or didn’t have any tax withheld. For 2020, taxpayers can elect to use their 2019 earned income to determine their 2020 earned income credit if their 2019 earned income was more than their 2020 earned income. Taxpayers who make this election should enter “PYEI” (prior year earned income) and the amount on the dotted line next to Form 1040, Line 27.
The Additional Child Tax Credit is for certain people who have at least one qualifying child for the child tax credit. The Additional Child Tax Credit may result in a refund even if the taxpayer doesn’t owe any tax or didn't have any tax withheld. For 2020, the taxpayer may elect to use their 2019 earned income to figure their Additional Child Tax Credit if their 2019 earned income was more than their 2020 earned income. Taxpayers who make this election should enter “PYEI” and the amount of their 2019 earned income on the dotted line next to Line 28.
C. Deductible Educator Expenses: Eligible educators can deduct up to $250 ($500 married filing jointly) of qualified educator expenses before arriving at adjusted gross income. Educator expenses include amounts paid or incurred after March 12, 2020, for personal protective equipment, disinfectant and other supplies used for the prevention of the spread of coronavirus. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal or aide in a school for at least 900 hours during a school year. See Schedule 1, Line 10.
D. Self-Employment Tax Deferral: The Coronavirus Aid, Relief, and Economic Security (CARES) Act permits certain individuals who file Schedule SE or Schedule H to defer the payment of 50% of the social security tax imposed for the period beginning on March 27, 2020 and ending December 31, 2020. See the instructions for Schedule SE or Schedule H.
E. Self-Employed Sick and Family Leave Credits: The Families First Coronavirus Relief Act assists self-employed individuals impacted by coronavirus by providing paid sick leave and paid family leave credits equivalent to those that employers are required to provide to employees for the period April 1, 2020-December 31, 2020. See Form 7202 and Schedule 3 for more details.
2. Above-the-line charitable contribution deduction
Taxpayers that chose the standard deduction instead of itemizing deductions on Schedule A (Form 1040) may qualify for a deduction for charitable contributions. The deduction is taken before arriving at adjusted gross income.
The maximum deduction amount is $300 for single, head of household, qualifying widow(er), or married filing joint status. The maximum amount for married filing separately status is $150.
The contributions must be made to organizations that are religious, charitable, educational, scientific or literary in purpose. Contributions of noncash property and contributions carried forward from prior years do not qualify for this deduction. See IRS Publication 526 for more information on qualifying organizations and contributions.
3. Increased standard deduction amount
For 2020, the standard deduction amount has been increased for all filers. The amounts are:
- Single or married filing separately—$12,400.
- Married filing jointly or qualifying widow(er)—$24,800.
- Head of household—$18,650.
4. IRA contributions deductible for all ages
If a taxpayer made contributions to a traditional IRA for 2020, they may be able to take an IRA deduction. Taxpayers no longer need to be younger than age 70½ to take a deduction for their contributions to an IRA. See Schedule 1, Line 19 of Form 1040.
The only requirement is that the taxpayer (or their spouse if married filing jointly) have earned income. For IRA purposes, earned income includes alimony and separate maintenance payments reported on Schedule 1, line 2a of Form 1040.
If the taxpayer was a member of the U.S. Armed Forces, earned income includes any nontaxable combat pay they received. If the taxpayer was self-employed, earned income is generally their net earnings from self-employment if their personal services were a material income-producing factor.
If the taxpayer made any nondeductible contributions to a traditional IRA for 2020, they must report them on Form 8606.
Also important to note, any deductible IRA contribution after age 70½ will reduce the amount of available qualified charitable distribution (QCD) by that amount.
5. Virtual currency requirement
According to the IRS, virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency ("real currency"), that functions as a unit of account, a store of value or a medium of exchange.
A transaction involving virtual currency includes, but is not limited to:
- The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork
- An exchange of virtual currency for goods or services
- A sale of virtual currency
- An exchange of virtual currency for other property, including for another virtual currency
- A disposition of a financial interest in virtual currency
If the taxpayer engaged in any transaction involving virtual currency in 2020, check the "Yes" box next to the question on virtual currency on page 1 of Form 1040.
I hope this tax advice has been helpful for filing your taxes in a year that is anything but ordinary. Keep visiting the Becker blog for the latest tax updates that you need to know.
The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.
Tara Fisher has been practicing tax for over 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.
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