The American Tax Cuts and Jobs Act (TCJA) continues to be the law of the land, and the (relatively) new law will affect your 2020 income tax return. It affects your estimated tax payments, the money withheld from your paycheck, and your income tax return for 2020.
This means that you need to understand what changes have been made so you can file your 2020 return and make sure you’re paying in enough taxes to avoid getting hit with penalties and interest. Here are some of the major items of note in this newish tax law that will likely affect you:
1. Increased Standard Deduction and Elimination of Exemptions
The TCJA brought big changes when it comes to the standard deduction and exemptions. Exemptions were eliminated altogether, which can hurt some families substantially. That said, the standard deductions have almost doubled since 2017, which offers some relief. (See the table below for details.)
|Filing Status||2017 Standard Deduction||2018 Standard Deduction||2019 Standard Deduction||2020
|Married filing jointly||$12,700||$24,000||$24,400||$24,800|
|Married filing separately||$6,350||$12,000||$12,200||$12,400|
|Head of household||$9,350||$18,000||$18,350||$18,650|
Because a personal exemption was worth $4,050 in 2017, single filers with no dependents taking the standard deduction have come out ahead. Where the total deduction would have been $10,400, the TCJA allows $12,400.
A married couple with no dependents filing the standard deduction have benefited, too. In 2017, prior to the tax law’s passing, the standard deduction and two exemptions were worth $20,800, but the standard deduction for 2020 filing is $24,800.
Unfortunately, if you have dependents, the increased standard deduction probably won’t offset the loss of the exemptions you would have been able to claim in 2017. Other changes in the law may help lower your tax burden, though.
The major change that comes with the increased standard deduction is the effect on people who used to itemize deductions.
In the past, you could get both itemized deductions and exemptions, but now you can claim only itemized deductions. In addition, the increased standard deduction means that many people may no longer benefit from itemizing their deductions.
2. Changes in Income Tax Rates and Brackets
The income tax rates and brackets changed with the TCJA. While the brackets are different for each filing status, the rate structure remains the same across all four filing statuses (single, married filing jointly, married filing separately, and head of household). Below is a comparison of the 2017 tax rates and brackets and the 2020 tax rates and brackets for a single person.
|2017 Brackets||2017 Rates||2020 Brackets||2020 Rates|
|$0 to $9,325||10%||$0 to $9,975||10%|
|$9,326 to $37,950||15%||$9,976 to $40,125||12%|
|$37,951 to $91,900||25%||$40,126 to $85,525||22%|
|$91,901 to $191,650||28%||$85,526 to $163,300||24%|
|$191,651 to $416,700||33%||$163,301 to $207,350||32%|
|$416,701 to $418,400||35%||$207,351 to $518,400||35%|
|$418,401 and up||39.6%||$518,401 and up||37%|
The big takeaway is that tax rates have generally decreased. While people in the 10 percent and 35 percent tax bracket won’t see a reduction in their rate, most everyone else should see some relief.
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The child tax credit has gone through big changes since the law was introduced. The credit was only $1,000 per qualifying child in 2017 and was nonrefundable if you didn’t owe income tax.
The 2021 credit is worth a maximum of $2,000 per qualifying child and is refundable up to $1,400, meaning you’d get a tax refund for this credit even if you don’t owe a penny to the IRS. The income limit at which the credit phases out has been increased to $200,000 for single filers and $400,000 for those who are married filing jointly.
This bigger credit and its refundability has helped offset some of the loss of the exemptions. But as with any tax scenario, how these changes affect you depends on your personal situation.
4. Changes to Itemized Deductions
Itemized deductions have been significantly changed. As always, you should itemize your deductions only if the amount will be higher than the standard deduction. With the higher standard deductions in the new tax law, this level is harder to reach. Combined with some of the big changes below, itemizing deductions are much less popular than in the past.
Medical and dental costs actually work out in your favor, as you can deduct expenses that exceed 7.5 percent of your adjusted gross income rather than the old 10 percent threshold, giving you 2.5 percent more to deduct.
State and local taxes are still itemized deductions, but they’re much more limited than in the past.
In previous years, you could deduct state income tax or state sales tax plus property taxes with no caps. In 2021, you’ll be able to deduct only a combined $10,000 of these taxes in your itemized deductions.
The TCJA also significantly affects your situation if you own a home, as mortgage interest was changed with the law’s passing.
You are no longer able to deduct interest on home equity debt, unless it is used to either buy, build, or improve your home significantly. Mortgage debt interest has also been capped at a mortgage value of $750,000 rather than the previous $1 million limit.
It is important to note, however, that debts incurred prior to 2017 will still be deductible at a $500,000 rate for married filing separately and a $1 million rate for married filing jointly, according to the IRS.
Finally, many employment-related deductions for W-2 wage earners were eliminated by the TCJA — important to note if you intended to deduct your expenses individually from your taxes.
If you are handling your own return, make sure you work with the product that’s best for your needs — ensure that the tax software you use is best suited for your employment classification, and can handle the breadth of your deductions.
The Bottom Line
As always, you should consult a tax professional with any concerns about your personal situation, and as a means of getting the most out of your return.
Make sure to prepare ahead of time as much as possible to avoid the stress of a last-minute filing. However, if you do make any mistakes, be sure to take the necessary steps and file an amended tax return as soon as you can.
Additional background information for this article was provided by Bret Scholl, CPA, of Scholl & Company.