How the 2020 Coronavirus related legislation can affect your tax deductions

The CARES Act and the 2020 year-end coronavirus relief bill had a lot built into them.  As we start the 2020 tax return season, here are a few items affecting individual taxpayers that we feel are most relevant:

Certain charitable contributions deductible by non-itemizers

Many who take the standard deduction, which became more popular after the Tax Cuts and Jobs Act of 2017 raised the standard deduction amounts, will be able to deduct $300 in 2020 for all taxpayers and $600 in 2021 for married couples filing jointly. This means that if you made a cash contribution directly to a 501(c)(3) you will be able to reduce your taxable income by up to $300 in 2020 and $600 in 2021. It is important to note that the contribution must be in cash, check, or credit card, and it must go directly to the charity and not a donor advised fund or 509(a) (3) supporting organization.

For those who itemize their deductions, they will be able to deduct 100% of cash contributions in 2020. Normally there is a limit of up to 60% of Adjusted Gross Income (AGI) on charitable cash contribution deductions.

Unused Dependent and Healthcare FSAs:

If you have an unused dependent care or healthcare FSA account and your employer elects to implement this option, you can roll over the unused 2020 amounts to 2021 and then again from 2021 to 2022. Also, the time for using 2020 and 2021 funds has been extended 12 months. FSA participants are also allowed to modify their 2021 elections during the year – normally, this is not allowed.

Education Related Changes

The above-the-line deduction for qualified tuition expenses will be gone in 2021. But, in its place, the phase-out limit on the Lifetime Learning Credit has been increased to match the phase-out limit for the American Opportunity Credit. This is effective for 2021.

Medical expense floor lowered to 7.5% of AGI

For those who itemize, the floor for deducting eligible medical expenses has been lowered to 7.5% from 10% of Adjusted Gross Income (AGI). For example, if your AGI is $100,000, then you can deduct any medical expenses over $7,500.

Educator expenses for protective equipment

Teachers who have had to spend their own money on personal protective equipment and cleaning supplies used to prevent COVID – 19 in their classrooms during 2020 can apply those expense towards the existing educator expense deduction of $250 on their federal taxes. This is an above the line deduction, which means you don’t need to itemize to take advantage of it.

Required Minimum Distributions (RMD)

RMDs from IRA Accounts were waived for 2020. But they have been reinstated for 2021.

A few tax extenders built into the legislation that may affect you. This is not a complete list:

      • $500 lifetime energy credit on principal residence extended through 2024.
      • Mortgage insurance premiums will continue to be treated as qualified residence interest through 2021.
      • Non-business energy property, energy efficient homes and assorted electric vehicle credits extended through 2021.

If you have specific questions, feel free to call your advisor and/or consult with your tax preparer.

Michael Angelucci, MBA, CFP®
Financial Advisor

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