It's been a year of significant change. Amid the 2020 upheaval, you may not have noticed several regulatory and legal changes that could impact your taxes. We recommend reviewing the following tax considerations with your tax professional to determine if any of these items apply to your situation. Keep in mind, this list is not all-encompassing, only meant for educational purposes and not intended as tax advice.

Economic impact payments 

As part of the 2020 pandemic-related legislation, many households received a stimulus check. If you received a stimulus check, you do not need to include the payment in taxable income on your 2020 tax return or pay income tax on the payment. It will not reduce your refund or increase the amount of tax you owe when you file your 2020 federal income tax return. Any eligible individual who did not receive the full amount of the Economic Impact Payment may be able to claim the Recovery Rebate Credit on a 2020 Form 1040 or Form 1040-SR. 

What this means for you:

  • If you received a stimulus check, let your tax professional know and retain a copy of the letter sent by the IRS for your records. 
  • If you did not receive a stimulus check or believe you should have received a larger stimulus check, work with your tax professional to see if you are eligible for the Recovery Rebate Credit.

Retirement account contributions 

Contributing to an IRA can help you progress toward your retirement goals and generally reduces your taxes (now and/or in the future). The IRA contribution limit in 2020 is $6,000 ($7,000 for those age 50 and older) per individual, subject to certain income requirements. Starting in 2020, individuals can contribute to a traditional IRA past age 70½, so you may be eligible to contribute in 2020 even if you have not been eligible in previous years. You can make IRA contributions for 2020 up to the tax-filing deadline, which has been extended to May 17 this year. 

What this means for you: 

  • Bring your most recent account statement to review your 2020 IRA contribution activity with your tax professional. 
  • If you have not already contributed the maximum amount and have funds available, work with your tax professional to determine if you meet the income requirements and which account type, traditional or Roth, is most advantageous for your specific situation. 
  • Make traditional or Roth IRA contributions on or before the tax-filing deadline. 
  • You will receive a Form 5498 for your contribution activity in May. You do not need this form to file your taxes, but you should retain it for your tax records.

Retirement account distributions

Required Minimum Distributions (RMDs)

Under the CARES Act, RMDs were waived in 2020 for all employer plans (except defined benefit plans) and IRAs, including inherited accounts. If you took a distribution in 2020 to satisfy your RMD, you will receive a Form 1099-R for the distribution, even if you rolled over or repaid the distribution back to your retirement account.

COVID-19-related distributions

Typically, distributions from traditional IRAs are subject to taxes. If you are below age 59½, you’d pay an additional 10% penalty on a distribution from any IRA. Under the CARES Act, qualified individuals could take up to $100,000 of coronavirus-related distributions from eligible retirement accounts in 2020 without paying the 10% early withdrawal penalty.

COVID-19 distributions are generally still taxable; however, you have the option to include the full amount of the distribution in taxable income for 2020 or to spread the amount equally over three years, beginning with calendar year 2020. Unlike many retirement account distributions, you also have the option to recontribute a COVID-19 distribution back into any retirement account eligible to receive a rollover for up to three years from the day after the distribution was received. 

What this means for you: 

  • If you took distributions from a retirement account in 2020, bring your 1099-R tax form to review with your tax professional. 
  • Work with your tax professional to determine if any of your distributions qualify as coronavirus-related distributions, including those that may have originally been taken to satisfy an RMD. If the distributions qualify, discuss with your tax professional whether it's more advantageous to include the full amount of the distributions this year or spread it out over the three-year period. 
  • If you rolled over or recontributed some or all of these distributions, bring your year-end and most recent account statements to review your activity with your tax professional. You will receive a Form 5498 for your rollover/recontribution activity later this year. You do not need this form to file your taxes, but you should retain it for your tax records.
  • If you have not recontributed the full amount of the COVID-19-related distributions taken and have funds available, recontributions made through the tax-filing deadline, including extensions, could reduce your 2020 taxes.

Unemployment Benefits

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. While unemployment benefits are generally taxable, the bill makes the first $10,200 of unemployment benefits free from federal income tax for 2020 only for individuals with adjusted gross incomes less than $150,000. For joint filers, each spouse can exclude $10,200 of unemployment benefits; however, the combined adjusted gross income must be less than $150,000 to qualify.

What this means for you:

  • Work with your tax professional to incorporate this provision into your tax filing.
  • For impacted individuals who have already filed their 2020 taxes, the IRS will automatically refund money or apply any overpayment to other outstanding taxes owed over the spring and summer. You do not need to file an amended return unless the calculations make you newly eligible for additional federal credits and deductions not already included on the original tax return. Work with your tax professional to determine if you need to amend your filing.

529 plan contributions, distributions and gifting

Contributions to 529 plans may be eligible for state tax deductions. 529 assets benefit from tax-deferred growth, and funds can be withdrawn from a 529 plan tax-free when used for qualified education purposes. Additionally, 529 plans have advantageous gifting rules allowing the contributor to spread the gift equally over five taxable years. 

What this means for you: 

  • If you contributed to a 529 plan in 2020, bring a statement showing your 529 contributions to your tax professional so they can determine if you are eligible for state tax benefits. 
  • If you took a distribution from your 529 plan in 2020, bring your Form 1099-Q to your tax professional so they can include the information when preparing your tax return. Also, be sure to retain tax forms and proof of qualified expenses for your records. 
  • If you're interested in or using an accelerated 529 gifting strategy, consult with your tax professional to understand the impacts to your taxable estate and future filings.

Long-term care insurance

If you paid premiums on a tax-qualified, long-term care insurance policy for yourself, your spouse or tax dependents, you may be eligible to deduct these premiums if you itemize your deductions. 

What this means for you: 

  • Bring a statement showing your long-term care premiums for the year so your tax professional can determine what amount, if any, can be included as a qualified medical expense.

Individual charitable contributions and gifts

There is now an above-the-line deduction for up to $300 of cash contributions to charities for taxpayers opting for the standard deduction. For those who itemize their deductions for charitable giving, the 60% of adjusted gross income limit for cash gifts is suspended for 2020 if certain conditions are satisfied. 

What this means for you: 

  • Bring your charitable gift receipts to review your charitable giving activity with your tax professional. 
  • If you itemize deductions, ask your tax professional if the temporary suspension of limits on charitable contributions applies to you.

Business owners

If you’re a business owner, there are many new programs and tax credits available for 2020 that may impact you. Before you meet with your tax professional, ask your financial advisor for more information on items specific to business owners.

Providing your tax professional with the right information can help ensure you’re taking full advantage of the options available for your situation and getting credit for all the hard work you put in during 2020 toward achieving your financial goals.

Meagan Dow

Meagan Dow leads the Analyst team within Edward Jones Client Needs Research. This team focuses on creating advice and guidance helping investors prepare for retirement, enjoy their retirement, save for education, plan their estates and protect their financial goals.

Meagan is a Chartered Financial Analyst and a Certified Financial PlannerTM.

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Important information:

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes.