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The 2020 tax law changes were exciting, complicated, and presented opportunities for taxpayers to incorporate new strategies into their financial plans. The following are several helpful tips to ensure your financial plans are carried out the way in which they were intended.

Retirement Accounts

In March 2020, the CARES Act suspended Required Minimum Distributions (RMDs). Because the Act was passed in early 2020, some taxpayers had already taken IRA distributions for a few months. Thankfully the IRS allowed most IRA distributions to be returned penalty-free to the owner’s account (if returned by August 31, 2020 or within 60 days of the initial distribution).

It is likely that the 1099-R you receive from your custodian will show the entire distribution as taxable. If you put money back into your IRA, it’s imperative to keep a copy of the returned distribution, and provide this information to your tax preparer so he or she can make the necessary changes to your tax return to let the IRS know the distribution is not taxable.

In addition to RMD suspension, the CARES Act also waived the 10% penalty on coronavirus-related retirement distributions below $100,000 for taxpayers under age 59½. The entire distribution can be included under 2020 income or applied ratably over a three-year period. Let your accountant know if you took these distributions because you must attach Form 8915-E to your return if you prefer to spread the distributions to potentially reduce your overall tax rate.

Unemployment Benefits

Due to COVID, many taxpayers applied for unemployment benefits (which count as taxable income). Unfortunately, scammers took advantage of the increase in applicants and filed fraudulent claims using stolen identities.* If you never received your unemployment benefits due to identity theft, you might still receive a Form 1099-G showing unemployment income. If the benefits reported and benefits received are different, the IRS recommends contacting your state to issue a revised Form 1099-G – you are only required to pay tax on benefits received.

*If you are the victim of one of these or another identity theft scam, it is recommended that you obtain an IP PIN from the IRS’ website. This IP PIN is a unique, six-digit code that must be used when filing your tax return. In the event someone else tries to fraudulently file a return using your name or SSN, they will not be successful if they do not have this IP PIN.

Stimulus Payments

If you were eligible and did not receive your Economic Impact Payments, you can claim the Recovery Rebate Credit on your Form 1040. This is especially important for taxpayers who aren’t normally required to file tax returns. Consider using this link to calculate eligibility for your second stimulus payment.

Charitable Planning

The Tax Cuts and Jobs Act significantly increased the standard deduction (and capped state and local tax deductions). This reduced the number of taxpayers eligible to itemize, so many filers could not capture charitable contribution deductions on their tax returns.

The CARES Act allows a maximum $300 charitable deduction for cash contributions for taxpayers who do not itemize. Many accountants stopped asking for charitable contributions from clients who don’t typically itemize, so it’s important to include your cash charitable contribution information with your tax documents even if your accountant does not specifically ask for them.

Qualified Charitable Distributions (QCDs) are often used as a tax planning strategy to reduce RMDs and IRA balances. If you used this tax strategy in 2020, make sure to include the QCDs with your tax documents. The Form 1099-R the custodian sends you makes no distinction between taxable distributions and QCDs. Therefore, it’s important to send your accountant proof of QCDs to make sure they aren’t taxed.

During 2020, the cash charitable contribution limit increased from 60% to 100% of adjusted gross income (AGI) on contributions given directly to charities. This differs from cash contributions to Donor Advised Funds (DAFs) which remain deductible up to 60% of AGI. Let your accountant know whether you gave directly to a charity, or directly to a DAF to make sure you receive an accurate deduction on your tax return.

529 Contributions

529 contributions are a great way to save for college, and depending on your state tax laws, they can also provide an immediate tax deduction. It’s important to include your 529 contribution information with your tax documents so you can receive credit for your 529 contributions from your state (if applicable).

Communication & Your 2020 Tax Return

Open and consistent communication between taxpayers, financial advisors, and tax preparers helps to ensure tax returns are prepared accurately.

Unfortunately, many standard IRS forms don’t include specific transaction information. Therefore, it’s entirely possible for a fantastic tax-saving financial plan to go awry if it is not properly communicated to the tax preparer. Consider reaching out to your financial advisor and tax preparer to make sure your financial plans are carried out accurately this tax season.


Source: Kiplinger

This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique circumstances.

Author Alexander E. Strauss Tax and Business Services Specialist

Alex has been involved in the financial services industry since 2016. He earned a bachelor of science/master of professional accountancy degree from Illinois State University and is a member of the American Institute of CPAs.

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