If you follow the news at all, you know a new law was passed on December 27, 2020. While most public attention focused on stimulus checks and new PPP loans, there were other nice benefits in it. The bill contained 8 tax breaks for US taxpayers especially for those who aren’t business owners.
While none of these tax breaks are earth-shattering, they can add up to a nice tax present for COVID-19-weary Americans.
Let’s review the 8 tax breaks that might help you.
8 Tax Breaks
- deduct cash contributions to charity even if you don’t itemize,
- deduct up to 100% of your adjusted gross income (AGI) as a charitable deduction,
- lengthen to one year the time you have to repay your 2020 employee Social Security taxes if you had them deferred by your employer,
- deduct medical expenses in 2021 using the now-extended 7.5% of AGI (only if you itemize),
- carry over unused flexible savings account (FSA) funds to next year,
- use your 2019 income to qualify for the earned income tax credit and/or child tax credit if you’re 2019 income was lower than 2020,
- if you’re a teacher, you can now deduct out-of-pocket expenses for personal protective equipment (PPE), and
- if you’re a higher-income taxpayer, take advantage of the lifetime learning credit in 2021.
1. Charitable Contribution Tax Deduction
Usually, charitable donations are only deductible if you itemize deductions vs. taking the standard deduction. This would be on a Schedule A.
In the past, about 30% of taxpayers itemized. In more recent years, only about 10% itemize because the Tax Cuts and Jobs Act practically doubled the standard deduction. Therefore, the majority of individual taxpayers don’t get any tax benefit from charitable contributions. Should that stop you from making them? Absolutely not.
The idea behind this was to help struggling charities that rely on donations by allowing taxpayers to take a deduction even if they don’t itemize deductions. Win-win!
In 2020, you can take up to a $300 charitable deduction for any donations made to tax-qualified charities. Yes. That’s right. You get to take up to $300 in 2020 for charitable donations regardless if you itemize.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends this deduction to 2021 only and allows the deduction to increase to $600 for married file jointly regardless if you itemize. For single taxpayers, the amount remains at $300.
2. Elimination of Limit on Charitable Contributions
Pay attention to this if you make large donations to charity AND are able to itemize deductions. This only applies to you.
Under regular tax rules, the amount of charitable cash contributions taxpayers can deduct if you itemized deductions (Schedule A) was limited to 60% of the taxpayer’s adjusted gross income (AGI). The CARES Act increased this deduction to 100 percent of AGI for cash deductions to qualified charities (not including donor-advised funds). The latest tax law extends this 100% of AGI charitable deduction to 2021.
Planning point. I don’t know of too many situations where it’s a good tax planning strategy to donate an amount equal to 100% of your AGI.
3. Payroll Tax Deferral Lengthened
If you receive a W2 as an employee, then this might help you. If not, then move onto #4 since this won’t apply to you.
Back in August 2020, President Trump signed an executive order allowing employers to defer withholding the employee portion of the Social Security tax due for September through December 2020. The deferred amount would then be withheld from the employees’ pay from January through April 2021.
Payroll tax deferral was completely voluntary and very few private employers actually took advantage of this tax provision. However, tax deferral was mandatory for most federal and military employees.
The idea behind the payroll tax deferral was to create more pay for employees during a difficult financial time.
The COVID-related Tax Relief Act of 2020 allows employees who had their Social Security taxes deferred to pay
them back by December 31, 2021, instead of by April 30. Repayments of the Social Security tax are to be made apportioned during these months.
This helps spread out the repayment over 12 months vs. only the original 4 (January – April) which hopefully doesn’t impact employee pay too much.
4. Medical Expense Deduction
If you itemized deductions, then it is possible to deduct medical expenses including doctor fees, dentist costs, eyeglasses, copays, health insurance payments, etc. However, in order to deduct them, the medical expenses must exceed a percentage of the taxpayer’s adjusted gross income (AGI).
For several years, this AGI floor has fluctuated between 10% and 7.5% of AGI. The rate is 7.5% of AGI for 2020, and before the new law, it was scheduled to go up to 10 percent for 2021 and later.
However, with the passing of the latest act (Taxpayer Certainty and Disaster Tax Relief Act of 2020), the 7.5% of AGI became permanent.
Hopefully, this makes it a bit easier for taxpayers who itemize to deduct their medical expenses.
5. Flexible Spending Account
If you work for an employer as a W2 employee, they might offer a flexible spending account (FSA) to you. The FSA is a tax-free account to help pay medical expenses including medications, eyeglasses, copays, etc.
Under regular tax rules, employees who have health flexible spending accounts (FSAs) may carry over a maximum of $550 of unused funds in the account to use the following year.
The latest taw law (Taxpayer Certainty and Disaster Tax Relief Act of 2020) now allows employees to carry over any unused 2020 balances to 2021. Moreover, any remaining balance at the end of 2021 may be carried over to 2022.
Before this rule, many people would lose their FSA money after December 31. This is a welcome change and relief for anyone with money leftover in their FSA.
Planning point: Employers are not required to allow such carryovers in their FSA plan; it’s purely voluntary for the employer.
6. Tax Credits Benefit for 2020 Only
If you qualify for two of the most important federal programs including the earned income tax credit (EITC) and the child tax credit (CTC) and 2020 was a tough year financially, then you’ll like the update to this credit. For 2020 only, taxpayers are allowed to substitute their earned income for 2019 if it is greater than their earned income for 2020.
This means you could qualify for a larger EITC if your income was higher in 2019 than in 2020.
Really helpful for low-income taxpayers.
7. Educator Expenses Deduction
If you’re a teacher or educator for grades K – 12, then you normally get to take an above-the-line deduction of up to $250 for books and supplies.
Well, with COVID the federal government has allowed educators to include personal protective equipment. This includes disinfectants, masks, cleaning supplies, etc. to help with the spread of COVID. Purchases for these items must be made after March 12, 2020, to qualify.
There’s no change to the deduction amount. It remains at $250.
Note that the educator expense deduction is not available for homeschoolers, including parents who are teaching their children at home during the pandemic. It’s only for professional educators who work at least 900 hours during the school year.
8. Lifetime Learning Credit
The tax code quite a few credits for higher education, including the American opportunity tax credit (AOTC), the lifetime learning credit (LLC), and the tuition and fees deduction. While the tuition and fees deduction expires at the end of 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 is making the lifetime learning credit available to more taxpayers by increasing the phaseout income range for the credit.
For 2020, the lifetime learning credit phaseout range is $59,000 to $69,000 for single filers, and $118,000 to $138,000 for joint filers. Beginning in 2021, the lifetime learning credit phaseout range will be $80,000 to $90,000 for singlefilers, and $160,000 to $180,000 for joint filers.
This is the same as the American opportunity tax credit phaseout range. The main purpose here seems to be to simplify the tax code by reducing the number of education-related tax benefits taxpayers have to deal with.
Also, the lifetime learning credit is better than the tuition and fees deduction because it’s a tax credit, not a deduction. Unlike a deduction, which reduces only your taxable income, a credit is a dollar-for-dollar reduction in tax owed. The lifetime learning credit offers a credit of 20 percent of up to $10,000 in education expenses, for a maximum credit of $2,000.
The tuition and fees deduction allows you to deduct a maximum of $4,000 above the line ($2,000 if your AGI is over $65,000 if single, or over $130,000 for joint filers). Even if you were in the top bracket (37 percent), a $4,000d eduction would save only $1,480 in tax (but you can’t qualify for this deduction at all if your income is high enough to be in the 37 percent bracket).
Learn about other tax deductions for RVers as I answer the top 10 questions.
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