3 minute read
Highlights of Legislation Impacting Your 2020 Income Taxes
by Expert Contributor Jack Del Pizzo, CPA, Owner of Del Pizzo & Associates
Included in the massive legislation passed by Congress in 2020, to address the financial impact of the COVID-19 pandemic, were a number of tax breaks that caused taxpayers a great deal of confusion. As the May 17 tax-filing deadline approaches, here’s some Q&A about 2020 tax returns.
Q: What can I do to reduce my 2020 income tax?
A. If you’re eligible for a traditional IRA in 2020, you can make a maximum tax-deductible contribution of $6,000 plus, based upon your age, an extra $1,000 catch-up contribution. The IRA must be set up and funded by May 17, 2021. Even if only one spouse has wages or self-employment income, both spouses may be eligible for a separate contribution.
If you claim a standard deduction instead of itemizing deductions, you’re eligible to deduct $300 in charitable contributions you made during 2020. If you itemize deductions, your cash contributions to most charities during 2020 are deductible up to 100% of your income. (The previous limitation was 60% of your income.)
If you have business or rental income from a sole proprietorship or a pass-through entity such as a partnership, an LLC or an S corporation, remember to claim the qualified income deduction of 20%.
Q: Is there any special tax relief if I took a distribution from my traditional IRA?
A. Normally, distributions from traditional IRAs are taxed in the year received plus a 10% penalty if you are under 59½. During 2020, if you hadn’t reached age 59½ when you took a distribution from a retirement plan or traditional IRA due to COVID-19, the normal 10% penalty for a premature distribution is waived on distributions up to $100,000. The distribution is still taxable but you can elect to pay that tax over three years. On the other hand, amounts re-contributed within three years will not be taxable.
Q: Is there any special tax relief if my business had a loss in 2020?
A. If your sole proprietorship or pass-through entity incurred a loss in 2020, you may be eligible to receive a cash refund by carrying the loss against the taxable income reported on your 2015 through 2019 income tax returns. While you have three years to amend prior year returns by filing IRS Form 1040X, you may be able to receive a “quick refund” by filing Form IRS 1045, but it must be filed by December 31, 2021.
Q: Is the stimulus money I received taxable?
A. Stimulus checks paid to individuals are not taxable income. They are advance payments of a refundable tax credit that must be reconciled on your IRS Form 1040. PPP loans to businesses that are spent on payroll and other eligible expenses are not taxable income when forgiven. The initial IRS ruling — that expenses paid with the forgiven PPP loans were not deductible — created an unexpected tax liability for borrowers. Congress solved that dilemma by mandating that expenses paid with the forgiven PPP loans are deductible. Pennsylvania has adopted the same treatment as the federal government.
Jack Del Pizzo, Marple Newtown's Expert CPA and Owner of Del Pizzo & Associates
DEL PIZZO & ASSOCIATES, Certified Public Accountants
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