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What’s New This Year

Every year, laws can change and affect your tax situation. Here are some notable items:

  • Inflation adjustments – Nearly all the figures used to calculate federal income tax are adjusted each year for inflation. For example, for 2020 the 401k contribution limit was increased from $19,000 to $19,500, and catch-up contributions for those age 50 or older increased from $6,000 to $6,500.
  • Kiddie Tax - The 2017 tax law simplified a provision known as the kiddie tax, applying the tax rates of trusts, rather than parents’ tax rates, to the unearned income of certain children. Congress has repealed this change effective in 2020, so these rules once again use the parents’ tax rates. Taxpayers affected by these rules in 2018 or 2019 can choose to amend their returns for those years to use the parents’ tax rates.
  • Medical expenses – Beginning in 2020, amounts paid for over-the-counter menstrual care products count as medical expenses for various purposes, including HSAs and health flexible savings accounts.

Temporary measures enacted in response to the covid crisis include the following:

Charitable contributions – For 2020 only, taxpayers can deduct certain charitable contributions even if they don’t itemize. These contributions must be in cash (including check or credit card donations, but not donations of clothing or other non-cash items) and the amount is limited to $300.

HSAs – For 2020 and 2021, health plans can offer telehealth or other remote care services without a deductible and still qualify as “high-deductible” health plans eligible to be used with health savings accounts.

Retirement plans – Highlights of changes in this area: Individuals who otherwise would have had to take required minimum distributions from retirement accounts did not have to do so for 2020. Qualified coronavirus distributions from retirement plans are not subject to the 10% early distribution penalty and can be included in income over a period of three years or repaid to the plan within three years. The law also relaxed the rules for loans from retirement accounts. A previous law eliminated the age limit on contributions to traditional IRAs as of 2020, but as has always been true, contributors must have earned income to be eligible.

Talk to your tax advisor for more details.

Last updated on December 31, 2020