Frequently Asked Questions
What are the changes coming in 2020 due to the tax reform law?
The good news is the tax code didn’t undergo a massive overhaul in 2021. Moreover, some of the changes that were passed could end up saving you money. “While changes in tax laws are nowhere near as major as they were three years ago, there are still important new tax considerations,” says April Walker, lead manager for taxation at the Association of International Certified Professional Accountants.
Here are some of the biggest changes to understand before you start gathering your W-2s and 1040s.
The Consolidated Appropriations Act, 2021 is a $2.3 trillion spending bill that combines $900 billion in stimulus relief for the COVID-19 pandemic in the United States with a $1.4 trillion omnibus spending bill for the 2021 federal fiscal year and prevents a government shutdown.
American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Package or American Rescue Plan provides $1400 per person checks, increases the Earned Income Credit, Child Tax Credit, Child Dependent Care Tax Credit, and Extends Unemployment Insurance.
COVID- RELATED TAX RELIEF ACT OF 2020 provides a refundable tax credit in the amount of $600 per eligible family member, an Extension of certain deferred payroll taxes, Clarification of tax treatment of Paycheck Protection Program loans to name a few.
Under the Affordable Care Act, Americans without health insurance faced a tax penalty of up to 2.5% of a household’s taxable income. The Tax Cuts and Jobs Act of 2017 reduced that penalty to zero for 2019. So if you were uninsured last year, you won’t face a tax penalty. However, California is the exception!
People often bequeath their individual retirement accounts (IRAs) to loved ones. To avoid penalties, IRS rules require people who inherit an IRA to withdraw a minimum amount each year, tied to life expectancy. But starting in 2020, inherited IRAs will need to be drained within 10 years.
While that extra income may be welcome, it could push some into a higher tax bracket. And people who were planning on using inherited IRAs for their retirement savings may now have to speed up their timetables, forcing some to pay taxes on distributions sooner than expected. “This is going to push up taxes for people who inherit IRAs,” says Cathy Curtis, founder of Curtis Financial Planning in Oakland, Calif.
Meanwhile, other IRA rules are being relaxed. Taxpayers used to be barred from making new contributions to these accounts after they reached the age of 70½. But beginning this tax year, Americans can keep contributing to a traditional IRA beyond that point. That may be a welcome change for many, as more Americans than ever before are now planning on working into their golden years.
In tax year 2019, prudent savers can sock away more money tax-free than ever before. If your employer has a 401(k) or 403(b) plan, you can invest up to $19,500. And if you’re over 50, you can contribute up to $6,500 more. Both figures are $500 higher than before.
Families with high doctor bills are also getting a reprieve: if your medical expenses were more than 7.5% of your adjusted gross income, you can begin deducting those expenses. (That threshold had been set to increase to 10%.)
In tax year 2020, the IRS is also raising the standard deduction to $12,400 for individuals (from $12,200) and to $24,800 for married joint filers (from $24,400). The standard deduction has become more important than ever since 2018, when it rose to a high enough level that many taxpayers chose to stop itemizing.
Is there an age limit on claiming my child as a dependent?
To claim your child as your dependent, your child must meet either the qualifying child test or the qualifying relative test. To meet the qualifying child test, your child must be younger than you and either younger than 19 years old or be a “student” younger than 24 years old as of the end of the calendar year. There’s no age limit if your child is “permanently and totally disabled” or meets the qualifying relative test. In addition to meeting the qualifying child or qualifying relative test, your child must also meet all of the other tests for claiming a dependent. For example the dependent taxpayer test, citizen or resident test, and joint return test.
How much income can an unmarried dependent student make before they have to file an income tax?
An unmarried dependent student must file a tax return if his or her earned or unearned income exceeds certain limits. To find these limits, refer to Dependents under Who Must File, in Publication 501, Exemptions, Standard Deduction, and Filing Information. Even if you don’t have to file a federal income tax return, you should file if you can get money back (for example, you had federal income tax withheld from your pay or you qualify for a refundable tax credit). See Who Should File in Publication 501, for more examples.
To qualify for head of household filing status, do I have to claim my child as a dependent?
Generally, to qualify for head of household, you must have a qualifying child or dependent. However, a custodial parent may be able to claim head of household filing status with a qualifying child even if he or she released a claim to exemption for the child. See Noncustodial parent is claiming an exemption for my child; do I still qualify as head of household?
What should I do if I made a mistake on my federal return that I've already filed?
It depends on the type of mistake you made. Many mathematical errors are caught during the processing of the tax return and corrected by the IRS, so you may not need to correct these mistakes. If you didn’t claim the correct filing status or you need to change your income, deductions, or credits, you should file an amended or corrected return using Form 1040X, Amended U.S. Individual Income Tax Return. When filing an amended or corrected return Include copies of any forms and/or schedules that you’re changing or didn’t include with your original return. To avoid delays, file Form 1040X only after you’ve filed your original return. Generally, for a credit or refund, you must file Form 1040X within 3 years after the date you timely filed your original return or within 2 years after the date you paid the tax, whichever is later. Allow the IRS up to 16 weeks to process the amended return.
What is a split refund?
A split refund lets you divide your refund, in any proportion you want, and direct deposit the funds into up to three different accounts with U.S. financial institutions. Use Form 8888, Allocation of Refund (Including Savings Bond Purchases), to request to have your refund split or to use part or all of your refund to buy up to $5,000 in paper or electronic U.S. Series I Savings Bonds for yourself or someone else.
How do I know if I have to file quarterly individual estimated tax payments?
You must make estimated tax payments for the current tax year if both of the following apply: You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits. You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax to be shown on your current year’s tax return, or 100% of the tax shown on your prior year’s tax return (must cover all 12 months).
What are the tax changes for this year?
For highlights of the tax changes for the current tax year, refer to the “What’s New” section of the following: Individuals – Instructions for Form 1040, Instructions for Form 1040A, or Instructions for Form 1040EZ; Businesses – Publication 15 (Circular E), Employer’s Tax Guide, or the instructions of your current business tax forms.