2020 Tax Brackets and Tax Deductions: Silver Linings from COVID-19 Hardships

Two COVID-19 stimulus bills plus new tax deductions make the 2020 tax year different. Understand these changes and how they impact your income tax before you file.

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Key Takeaways

  • Two COVID-19 stimulus bills included new tax credits and deductions

  • Changes to the 2020 tax year could amount to hundreds of dollars in applicable credits or deductions

There are many things from 2020 we’d like to forever leave behind. Unfortunately, paying income taxes can’t be one of them. But the IRS did grant a one-month reprieve—regular income tax filings are due May 17, 2021, for income earned in 2020.

The pandemic may have a (small) silver lining: Because of the coronavirus and its hardships, you may qualify for some new tax credits or deductions. Also, some of the pandemic-related tax changes may enable you to use up to $100,000 of your retirement money without penalty for up to three years.

Coronavirus Aid, Relief, and Economic Security Act & COVID Relief Bill

The biggest year-over-year changes to income taxes came from the two pandemic stimulus packages, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March and the COVID relief bill approved in December.

“Be aware of the new tax credits and deductions under both relief packages. For some people, the credits or savings could be worth thousands of dollars,” said Lisa Greene-Lewis, a certified public accountant and tax expert for TurboTax.

Here are some highlights.

Unemployment and PUA

The good news: The $1,200 paid out in the spring to qualifying individuals and $600 recently in one-time federal stimulus relief payments for single filers aren’t taxable. However, any state unemployment payments, including those from state Pandemic Unemployment Assistance (PUA) programs, are taxable income. Although unemployment compensation is taxable, tax rates drop as income does. Recipients should expect to receive a Form 1099-G for 2020 payments that will be reported to the Internal Revenue Service (IRS).

If you worked or were otherwise self-employed during the same year you started receiving unemployment checks, you may be eligible to claim the Earned Income Credit, which is only available if your adjusted gross income (AGI) is less than the applicable maximum for the tax year. The applicable maximum AGI depends on your filing status and the number of qualifying children.

“Definitely look at it if your income went down in 2020,” Greene-Lewis said. “The IRS has reported that many people don’t obtain this credit because they are not aware of their eligibility.”

If you did not qualify for pandemic relief as an individual because of your income earned in 2019, but your earnings went down in 2020, you might be eligible for PUA programs going forward.

2020 Tax Brackets

The federal income tax rates remain unchanged for the 2020 tax year: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. But the income brackets are adjusted slightly for inflation. For individuals, if your income in 2019 was $84,201 to $160,725, your income tax rate was 24%, progressively. In 2020, the 24% rate threshold was $85,526 to $163,300. See the table.

And these rates are marginal rates, meaning that as you move from one bracket to the next, you’re taxed at a higher rate only on the income earned above the previous threshold.

Marginal Tax Rate 2020 Income Level (Single Filers) 2020 Income Level (Couples Filing Jointly)
10% $0–$9,875 $0–$19,750
12% $9,876–$40,125 $19,751–$80,250
22% $40,126–$85,525 $80,251 –$171,050
24% $85,526–$163,300 $171,051–$326,600
32% $163,301–$207,350 $326,601–$414,700
35% $207,351–$518,400 $414,701–$622,050
37% $518,401 and up $622,051 and up
Source: Internal Revenue Service

Taxes on Investments

Also noteworthy are the capital gains offsets that were already in play.

“In 2020 we had a volatile stock market. Some people took advantage of that and bought and sold at a profit or loss. You can still offset capital gains with losses,” Greene-Lewis mentioned, noting that the IRS lets you match those gains and losses—up to $3,000 per calendar year—and potentially lower your tax bill.

The losses can carry over indefinitely, meaning there’s no deadline by when you must match up your losses with gains going forward. Also, read carefully the time difference for what is considered a short-term or long-term investment. They’re taxed at different rates.

Other Tax Deductions for 2020

The deduction threshold for medical expenses decreased to 7.5% of your AGI, down from 10%. Don’t forget, nursing home care is included as an accepted medical expense.

Many people couldn’t use all the funds in their Flexible Spending Accounts (FSAs) in 2020. That may include the cost of summer camps and dependent care programs, many of which were canceled in 2020 due to the pandemic. The new legislation allows for some unspent FSA funds to roll over into 2021, but your employer must opt in to the rollover programs and fill out the required paperwork.

Filing taxes can be a drag, but a little awareness can go a long way in making the process a little less taxing.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

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Key Takeaways

  • Two COVID-19 stimulus bills included new tax credits and deductions

  • Changes to the 2020 tax year could amount to hundreds of dollars in applicable credits or deductions

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