Recovery Rebate Credit
The Recovery Rebate Credit is a new credit on Form 1040/1040-SR and it will be calculated in the same manner as the two Economic Impact Payments that were authorized by Congress and sent to taxpayers in 2020 and in January, 2021. Any Economic Impact Payments received by the taxpayer in 2020 or 2021 are not considered taxable for federal income tax purposes. However any amounts previously received by a taxpayer will reduce the Recovery Rebate Credit that can be claimed by the taxpayer on their 2020 tax return.
Unlike the earlier Economic Impact Payments which were based on prior year tax information (2019 or 2018), the Recovery Rebate Credit is based on the taxpayer's 2020 tax information. As a result, taxpayers that either failed to receive an Economic Impact Payment or received less that the amount they would be entitled to receive based on their 2020 tax information will claim this refundable credit when they file their 2020 tax return.
The Recovery Rebate Credit will be claimed on Line 30 of the Form 1040/1040-SR and the taxpayer will need to complete the Recovery Rebate Credit Worksheet to determine the credit amount. This worksheet includes the second Economic Impact Payment that was authorized by Congress in the Consolidate Appropriations Act, 2021 which became law on December 27, 2020. The Treasury Department is cautioning Taxpayers claiming this Recovery Rebate Credit to wait and file their 2020 tax return until after they receive the second Economic Impact Payment (EIP 2) or January 31, 2021 when the distribution of the second payments are expected to end.
Coronavirus tax relief for social security payments
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows certain taxpayers who file Schedule SE or Schedule H to defer the payment of 50% of the social security tax imposed for the period beginning on March 27, 2020 through the end of the year.
Paycheck Protection Program loan and covered expenses
The Paycheck Protection Program (PPP) established under the CARES Act provided SBA-backed loans to small businesses to assist with certain expenses, specifically related to payroll, employee healthcare benefits, mortgage interest, rent, utilities, and interest on existing debt obligations. Borrowers can apply for the loan to be forgiven once all the loan proceeds have been used to pay eligible expenses. For a taxpayer who received a PPP loan and had all or a portion forgiven, the forgiven portion of the loan is not to be included in income.
The IRS had previously indicated that the expenses related to the forgiven portion of the loan would not be deductible. See Notice 2020-32 for more information. However, with the passage of the Consolidated Appropriations Act, 2021, Congress reversed this position and stated that no deduction will be denied for any eligible expense that would otherwise be deductible and no tax attribute may be reduced and no basis increase may be denied due to the exclusion from gross income of any debt forgiveness under the PPP.
Form 1040 revisions
- On Form 1040/1040-SR, every line after line 4 has been renumbered due to design changes as well as two new lines and one relocated line:
- A taxpayer who made cash charitable contributions but did not itemize deductions can take up to $300 as a charitable contributions adjustment to income on line 10b. This adjustment amount is the same for all filing statuses.
- Estimated tax payments are now reported on line 26 rather than Schedule 3 line 8.
- If the taxpayer qualifies for any Recovery Rebate Credit, this is entered on line 30.
- The question on Schedule 1 regarding virtual currency, asking "... did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?", has been moved to the top of Form 1040/1040-SR.
- The paid preparer's 3rd party designee checkbox has been removed.
Form 1040-NR revisions
- Form 1040-NR will share Schedules 1, 2, and 3 with Form 1040/1040-SR.
- Form 1040-NR line numbers now begin with line 1 rather than line 8.
- The question regarding virtual currency, asking "... did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?", now appears at the top of Form 1040-NR.
- Schedules A, NEC, and OI are now separate from the main form.
Form 1040-SR revisions
In addition to incorporating the Form 1040 changes, Form 1040-SR has been expanded to four pages, incorporating a slightly larger font as well as more white space on the printed page.
Increase in the Standard Deduction
For 2020, the standard deduction amount for all filing statuses has increased as follows:
- Single or Married filing separately: $12,400 (up from $12,200)
- Married filing jointly or Qualifying widow(er): $24,800 (up from $24,400)
- Head of household: $18,650 (up from $18,350)
(The additional standard deduction amounts for taxpayers who are 65 and older or blind remains unchanged.)
Marginal tax rates
Marginal tax rate thresholds have ticked upward slightly. See the Knowledgebase article here for schedules comparing the 2020 marginal tax rates with the 2019 rates.
Standard mileage rates
The standard mileage rate allowed for operating expenses for a car used for medical reasons is reduced to 17 cents a mile from 20 cents. The business standard mileage rate and the rate for miles driven in connection with rental activities have both decreased to 57.5 cents per mile from 58 cents. (The rate of 14 cents a mile in service to charitable organizations remains unchanged.)
Earned Income Credit
The maximum earned income to receive the earned income credit has increased as follows:
|Qualifying children||Filing status||2019||2020|
|3 or more||MFJ||$55,952||$56,844|
Earned Income - Election to Use Prior Year Amounts For Earned Income
Under the Consolidated Appropriations Act, 2021, signed into law by the President on December 27, 2020, a taxpayer whose earned income is less in 2020 than in the previous year may elect to use their 2019 earned income to calculate the Earned Income Tax Credit and the Additional Child Tax Credit. In each case the taxpayer must note on the line on the Form 1040 that corresponds to the credit that "PYEI" is being used and the amount of the prior year earned income is printed.
Gross income limitation increase
The gross income limitation has increased from $4,200 to $4,300 for the following individuals:
- a child or stepchild of a qualifying widow(er);
- a qualifying relative for the child tax credit;
- a student for whom the student loan interest deduction is claimed.
The Consolidated Appropriations Act, 2021 provides that qualified disaster relief will apply to any presidentially declared disaster that occurred after December 31, 2019 through 60 days after the date of enactment of the Act (February 25, 2021). This extends the treatment given to personal casualty losses in federally designated disaster areas that had expired earlier this year. This extension allows affected taxpayers to increase their standard deduction amount after a $500 deductible by the net disaster loss.
Changes to IRA contribution rules
Among the many changes in the SECURE Act of 2019 (Setting Every Community Up for Retirement Enhancement) is that the taxpayer no longer needs to be under age 70-1/2 to take a deduction for IRA contributions. As a result, the amount of Qualified Charitable Distribution excludible from income will now be reduced by the total deductible IRA contributions made by the taxpayer on or after the date that they turned 70-1/2. (Taxpayers who turned 70-1/2 prior to 2020 will continue to follow the pre-SECURE Act rules with respect to QCDs.)
Also beginning in 2020, certain taxable non-tuition fellowship and stipend payments will be treated as compensation for the purpose of IRA contributions. Compensation will now include any amount included in gross income and paid to aid in the individual’s pursuit of graduate or postdoctoral study.
Charitable deduction changes
As noted above, a taxpayer who isn't itemizing can take a $300 above-the-line deduction for charitable contributions on Form 1040 line 10b. Additionally, for taxpayers who itemize the 60% AGI limitation is suspended for 2020.
Medical expenses reimbursement change
The CARES Act changed the text of IRC Section 106, now allowing nonprescription drugs to be reimbursed from an HSA, HRA, Health FSA, and Archer MSA. Tax preparers will need to bear this in mind when calculating a taxpayer's medical expenses, since only prescription drugs can be included in itemized deductions.
Qualified business income deduction
QBI income thresholds have increased as follows:
- Single, HOH, Qualifying Widow(er): $163,300 (up from $160,700)
- MFS, married nonresident alien: $163,300 (up from $160,725)
- MFJ: $326,600 (up from $321,400)
Health Savings Account (HSA) Deduction
For 2020, the annual contribution limits on deductions for HSAs for individuals with self-only coverage is $3,550 (up from $3,500) and $7,100 for family coverage (up from $7,000). Taxpayers who are age 55 or older can take an additional contribution of $1,000.
Investment income and the Earned Income Tax Credit
The maximum investment income to claim the Earned Income Tax Credit has increased from $3,600 to $3,650.
Spanish print option
The following forms will eventually be available to be printed in Spanish:
- Form 1040, 1040-SR, 1040-X
- Schedules 1, 2, and 3 (Form 1040)
- Schedule LEP
- Schedule 8812
- Schedule EIC
- Form 9000, Request for Alternative Format or Language (new and not yet available as of January 1, 2021)
Schedule LEP (Form 1040)
Schedule LEP, Request for Change in Language Preference, gives the taxpayer the ability to indicate their preferred language for written communications from the IRS, providing 20 language options other than English. In TaxSlayer Pro, this new form is found under Personal Information, then Other Categories menu. (LEP stands for Limited English Proficiency.)
Form 1099-NEC, Nonemployee Compensation
Income that would have been reported on Form 1099-MISC Box 7 is now reported on Form 1099-NEC, Nonemployee Compensation. In TaxSlayer Pro, enter it in the same menu as Form 1099-MISC is entered. Unlike Form 1099-MISC, payers must report Forms 1099-NEC to the IRS and the payees by January 31.
Form 2555 changes
Form 2555, Foreign Earned Income, shows two changes:
- The maximum exclusion has increased to $107,600.
- If a taxpayer did not meet the time requirements for either the bona fide residence test or the physical presence test because they relocated due to COVID-19, they may be entitled to a waiver and be treated as if they met either test, providing there is "a reasonable expectation" that the test would have been met but for the COVID-19 emergency. See Rev. Proc. 2020-27 for more information.
Form 5329 change
On Form 5329, the early distribution penalty exception code 12 "Other" now has two additional reasons:
- Coronavirus-related distributions (see IRS Notice 2020-50 for more information)
- Qualified birth or adoption distributions
Schedule SE change
The "short" calculation in Section A has been removed, and the form is now the equivalent of the "long" Section B. For 2020 there is a new Part III to indicate any tax payments being deferred under the CARES Act.
Form 461, Limitation on Business Losses
The CARES Act repealed the limitation on excess business losses of noncorporate taxpayers for tax year 2020, amending section 461(l) to restrict the limitation to tax years 2021-2025.
Form 7202, Credit for Sick Leave and Family Leave for Certain Self-Employed Individuals
The Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020 provides paid sick leave and paid family leave credits to self-employed individuals if they were unable to work or had to care for family members for reasons related to the coronavirus. These credits are equivalent to those that employers are required to provide their employees for qualified sick leave wages and qualified family leave wages paid during the period beginning April 1, 2020 through the end of the year. This is a refundable credit, calculated on Form 7202 and flowing to Schedule 3 line 12b.
With the passage of the Consolidated Appropriations Act, 2021, the Taxpayer may use 2019 net earnings from self-employment to determine their average daily self-employment income if the prior year self-employment income is greater than the 2020 amount.
Kiddie Tax and Form 8615
The Further Consolidated Appropriations Act 2020 reverts the “kiddie tax” to where it was before the Tax Cuts and Jobs Act of 2017, with a child’s unearned income taxed at the parents’ top marginal rates.
Form 8881, Credit for SEP Plan Startup Costs and Auto-Enrollment
The Further Consolidated Appropriations Act 2020 created a new credit for small employers with an auto-enrollment option for retirement savings. Form 8881 has been renamed and expanded to include this new credit.
Form 8915-C, 2018 Disaster Retirement Plan Distributions and Repayments
Taxpayers will use Form 8915-C to report a qualified distribution from an eligible retirement plan in 2020 prior to June 17 for a 2018 federally-declared disaster, a distribution from 2018 or 2019 that is being spread out over three years, or repayment of a 2018 distribution in 2020.
Form 8915-D, 2019 Disaster Retirement Plan Distributions and Repayments
Taxpayers will use Form 8915-D to report a qualified distribution from an eligible retirement plan in 2020 prior to June 17 for a 2019 federally-declared disaster, a distribution from 2019 that is being spread out over three years, or repayment of a 2019 distribution in 2020.
Form 8915-E, 2020 Disaster Retirement Plan Distributions and Repayments
Taxpayers will use Form 8915-E to report a coronavirus-related distribution from an eligible retirement plan in 2020, and they can optionally spread out the repayment over three years. (See IRS Notice 2020-50 for more information.)
529 plan expansion
The SECURE Act allows taxpayers to use withdrawals from a 529 plan to pay principal or interest on a designated beneficiary’s or their sibling’s student loan. Payments for this purpose are limited to $10,000 lifetime, and the interest paid doesn't qualify for the student loan interest deduction.
Individual Taxpayer Identification Numbers (ITIN) expiring
ITINs with middle digits “88” expire December 31, 2020. ITINs with middle digits “90”, “91”, “92”, “94”, “95”, “96”, “97”, “98”, or “99” that were assigned before 2013 and have not already been renewed also expire at the end of the year.