Federal and state tax returns for the year 2020

What a year we had! The surging pandemic, confusion over who gets a stimulus payment and an overwhelmed IRS workforce still trying to catch up on last year's delayed tax season. The tax season can be frustrating under normal circumstances especially if you're trying to reach the IRS spokesman. This year may prove to be an extreme exercise in patience. We are going into an unprecedented tax season with a bevy of changes as a result of the novel Coronavirus.

This is not the year to procrastinate. File your tax returns early. We at Moats and Hebebrand CPAs are here to help.

Many people who received unemployment benefits for the first time in 2020 may not realize this income is taxable for federal purposes. If you received federal unemployment benefits, look for IRS Form 100-6, which will show the amount you received from unemployment last year.

The federal standard deduction for:

• Married filing a joint return has increased from $24,400 to $24, 800.

• Head of Household has increased from $18,350 to $18,650.

• Single from $12,200 to $12,400.

• Married filing separately from $12,200 to $12,400.

Those who have itemized in the past may still have to keep track of deductions for the State of California.

The definition of a dependent is not changed. For example, eligibility for the Child Tax Credit hinges on whether the taxpayer may claim a qualifying child as a credit. A taxpayer who can claim a "qualifying child" as a dependent is eligible for a $2,000 Child Tax Credit. A taxpayer who can claim a "qualifying relative" as a dependent is eligible for a new $500 tax credit.

Medical Expenses

For 2020, in order to deduct medical costs and health insurance as an itemized deduction, your medical expenses must exceed 7.5 percent of your adjusted gross income. If you think your 2020 medical expenses exceed this threshold, take the time to assemble and total your medical costs. If you are sure your medical expenses are below the percentage of income levels, there will be no benefit in adding up your medical expenses. If you are self-employed, the tax preparer will need to know the amount you paid for medical insurance, since you can deduct those expenses even if they are below the percentage of income limits.

Penalty of not having health insurance

This penalty does not apply for the 2020 tax year for not having health insurance for Federal tax purposes. This means taxpayers without health insurance will not to be subject to the $695 penalty. For the year 2020, California taxpayers will have a penalty for no health insurance. Tax preparers are still required to report all health coverage information on the individual 2020 tax return.

Taxes

Taxpayers may claim an itemized deduction of up to $10,000 ($5,000 in the case of taxpayers filing separately) for the aggregate of state and local income taxes and property taxes. As before, a taxpayer may make an election to deduct sales tax and use tax (also limited to the $10,000 limit.) State and local taxes and property taxes paid in carrying on a trade or business, or rental activity, remain fully deductible.

Mortgage Interest

If you are paying mortgage interest you will receive a Form 1098 which states the interest you have paid on your mortgage in 2020. Please furnish the tax preparer with that information as the IRS is checking the deductions you claim with their records. If you refinanced your mortgage, furnish the tax preparer with the refinancing closing statements.

NEW: Effective for 2020, up to $300 of qualified charitable cash contributions are deductible from adjusted gross income on line 10b, Form1040 for taxpayers who take the standard deduction.

Charitable Donations

As in all prior years, all charitable donations reported on your tax return must have receipts to substantiate the deduction. If you made a donation over $250 you must have a properly dated letter from that charity acknowledging the donation, which clearly states that no goods or services were received in return for the contribution.

Miscellaneous itemized deductions

All miscellaneous deductions that are subject to the 2 percent floor are only deducted for State of California purposes.

2020 Standard Mileage Rates

• Business 57.5 cents per mile

• Depreciation 27.0 cents per mile

• Charitable 14.0 cents per mile

• Medical and moving 17.0 cents per mile

The office of Moats & Hebebrand CPAs makes a concerted effort to stay on top of the changes in the tax laws so you don't have to. Let us prepare your 2020 tax returns so you know they are done right! We are also open all year to assist with tax planning and to take care of our clients.