Personal Income Tax Planning for 2020

Take-Away: This month the IRS issued a Release that encourages individuals to take necessary actions in the final weeks of 2020 to help timely file their income tax returns early in 2021.

Background: In its Release [IR 2020-272, December 8, 2020] the IRS pointed out a couple of reminders to assist individuals with filing their income tax returns early next year, addressing credits, deductions, and refunds.

Tax Credits: An individual who received an Economic Impact Payment should retain Notice 1444 (“Your Economic Impact Payment”) with their income tax records. They may be eligible to claim a Recovery Rebate Credit on their 2020 income tax return, if either: (i) they did not receive and Economic Impact Payment, or (ii) their Economic Impact Payment was less than $1,200, or $2,400 if they filed jointly (for 2019 or 2018) plus $500 for each qualifying child they had in 2020. If the individual did not receive the full amount of the Economic Impact Payment for which they were eligible, they may be able to claim the Recovery Rebate Credit when they file their 2020 1040 return.

Tax Refunds: If an individual received a federal tax refund in 2020, they may have also been paid interest on the refund amount. Refund interest payments are taxable and must be reported on their 1040 income tax return. If interest was paid, the individual will receive in January 2021 a Form 1099-INT if the interest received totaled more than $10.00.

Charitable Deductions: For individuals who do not itemize their deductions (that would be most of us these days) they may take an charitable income tax deduction of up to $300 for cash contributions made to charities in 2020.

Refunds: The IRS acknowledged that tax refunds are not always timely paid, as some returns require more review and processing which takes longer. Refunds to those individuals who claim the Earned Income Tax Credit or the Additional Child Tax Credit should not expect any refund prior to the middle of February, 2021- this applies to the entire refund amount, even the portion that is not associated with these credits. The purpose of this reminder is ‘don’t spend it until you get it.’