As tax season goes on, one of the things to do is pay attention to changes in tax deductions and tax credits you can claim when filing your 2020 income tax return with the Internal Revenue Service, which is due by May 17, 2021. The federal filing date has been pushed, but note that this does not mean state taxes are due later than their deadline of April 15.
Read on to learn about what’s changed with taxes for this year’s filing and how you can take advantage of those tax law changes and tax breaks for tax year 2020.
Tax Credit vs. Tax Deduction
A tax credit is a dollar-for-dollar reduction on your income tax. Tax credits are categorized as either nonrefundable or refundable.
A nonrefundable tax credit means you will receive credit up to the amount of your tax bill. For example, if you have a tax credit of $1,000 but your tax bill is $900, you will only receive the amount for the $900 tax credit. You will not receive a refund for the excess credit. But a refundable tax credit means you will receive a refund if your tax credit is more than your tax bill.
A tax deduction, however, reduces the amount of your taxable income. The standard deduction is based on your applicable filing status. See below to understand how a tax deduction and tax credit affect your tax bill.
|Tax Credit vs. Tax Deduction|
|Tax Deduction||Tax Credit|
|Adjusted Gross Income (AGI):||$65,000||$65,000|
|*Figures provided are illustrative and not representative of actual tax rates or brackets as the U.S. uses a progressive tax system.|
New or Improved Tax Credits and Breaks for Tax Year 2020
Below are some of the new and improved tax credits and breaks that might change how you file, what you owe or what you get back from the IRS.
1. Tax Brackets Are Wider
The federal income tax system uses a progressive tax structure, which means that as you earn more income, your tax rate goes up as well. The IRS tax brackets increase each year with inflation, however. For example, the 10 percent tax bracket — the lowest bracket — includes all income up to the following amounts for each tax filing status:
- Married filing jointly: $19,750 — up from $19,400 in 2019
- Married filing separately: $9,875 — up from $9,700
- Head of household: $14,100 — up from $13,850
- Single: $9,875 — up from $9,700
2. Standard Deduction Increases
The standard deduction increased slightly for the 2020 tax year for all filing statuses. The increase could impact whether you claim the standard deduction or itemize. For 2020, the standard deduction for each filing status is as follows:
- Married filing jointly: $24,800 — up from $24,400 in 2019
- Married filing separately: $12,400 — up from $12,200
- Head of household: $18,650 — up from $18,350
- Single: $12,400 — up from $12,200
3. Earned Income Tax Credit Increases
The earned income tax credit underwent several increases in 2020. First, you can now have up to $3,650 worth of investment income for the year and still qualify for the EITC. Second, the maximum income you can have and still qualify for the EITC also increased for each filing status:
Married Filing Jointly
- No qualifying children: $21,710 — up from $21,370 in 2019
- One qualifying child: $47,646 — up from $46,884
- Two qualifying children: $53,330 — up from $52,493
- Three or more qualifying children: $56,844 — up from $55,952
All Other Filing Statuses
- No qualifying children: $15,820 — up from $15,570 in 2019
- One qualifying child: $41,756 — up from $41,094
- Two qualifying children: $47,440 — up from $46,703
- Three or more qualifying children: $50,594 — up from $50,162
If you qualify for the EITC, the maximum tax credit amount varies depending on how many qualifying children you have. These amounts also increased slightly for 2020:
- No qualifying children: $538 — up from $529 in 2019
- One qualifying child: $3,584 — up from $3,526
- Two qualifying children: $5,920 — up from $5,828
- Three or more qualifying children: $6,660 — up from $6,557
To claim the earned income tax credit, you must file Schedule EIC with your income tax return.
4. Higher Income Limits for Retirement Savings Contributions Credit
The retirement savings contributions credit rewards qualified taxpayers who save for retirement with a tax credit equal to a portion of their contributions to qualified retirement plans, including IRAs, 401(k) and 403(b) plans.
For the 2020 tax year, you can claim a credit equal to 10 percent of your contribution if your income falls into the following brackets:
- Married filing jointly: $42,501 to $65,000 — up from $41,501 to $64,000 in 2019
- Head of household: $31,876 to $48,750 — up from $31,126 to $48,000
- All others: $21,251 to $32,500 — up from $20,751 to $32,000
For other qualifying income levels, you can claim a saver’s credit of 20 percent or 50 percent of your contribution.
5. Increased Employer-Paid Parking or Transit Tax Breaks
Income and benefits you receive from your employer are typically included in your taxable income, except for qualified parking or transportation benefits. For 2020, the adjusted maximum monthly excludable amount your employer can provide is no more than $270 in qualified parking or transportation benefits. The applicable amount is already excluded from your taxable income.
6. Adoption Tax Credit
This is a nonrefundable tax credit for any taxpayer with a qualified adoption and qualified adoption expenses. Although the tax credit is nonrefundable, “any credit in excess of your tax liability may be carried forward for up to five years,” according to the IRS. The maximum amount for 2019 was $14,080 per child, but has increased to $14,300 for 2020. Restrictions, however, do apply for taxpayers with higher incomes.
For 2020, if you have a modified adjusted gross income above $254,520, you cannot claim this credit.
7. Green Energy Tax Credit
Known as the residential energy efficient property credit, this credit is for taxpayers who made green improvements to a place they used for a personal residence in 2020. This credit amounted to 30% of costs in 2019, but that dropped to 26% for 2020.
8. HSA Contribution Limits
A health savings account is a type of savings account that is designated to pay for qualified medical expenses for you, your spouse or your dependents. Any money contributed to your HSA is tax deductible or pretax.
In order to qualify for an HSA, you have to be enrolled in a high-deductible health plan (HDHP). According to the IRS, you can “claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions.” In addition, any contributions that your employer makes to your HSA may be excluded from your gross income.
|HSA Contribution Limits|
|Additional catch-up amount for people 55 or older||$1,000||$1,000|
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