Photo of a woman who is filing her 2020 taxes.

Filing your 2020 taxes: what to remember

The United States Tax Code can be complex, and pandemic-related legislative changes may make filing taxes even more confusing this year. Luckily, though, you’ve got a little more time than usual: The Internal Revenue Service extended the federal filing deadline to May 17, 2021.

That gives you a few extra weeks to figure out what you owe and what you might be able to deduct. For example working remotely, even temporarily, probably won’t change what you owe. “It’s important to review your tax situation every year,” says Tyler De Haan, director of business development retirement solutions for Principal®. “As life changes, so could your taxes.”

Review these tips to get organized and see if you may be able to save on your taxes this year.1

It’s important to review your tax situation every year. As life changes, so could your taxes.”

Tyler De Haan, director of business development retirement solutions

Find your 2020 federal tax bracket

Know where you fall in the 2020 federal tax bracket, especially if you’ve had a drastic change in salary in the last year. Your earnings from 2020 apply to the tax return you file this season.

Income Tax RatesSingle Married Filing Jointly
10%$0 to $9,950$0 to $19,900
12%$9,951-$40,525 $19,901- $81,050
22%$40,526 to $86,375$81,051 to $172,750
24%$86,376 to $164,925$172,751 to $329,850
32%$164,926 to $209,425$329,851 to $418,850
35%$209,426 to $523,600$418,851 to $628,300
37%$523,600+$628,300+2

Home office tax deductions and stimulus check taxes

Millions of people shifted from an office to working from home this year due to the COVID-19 pandemic. However, that change is unlikely to affect federal taxes for most. Here’s why.

  • You can’t claim a federal tax deduction for your home office or home office expenses unless you’re self-employed.
  • If you’re self-employed, the home office must be dedicated solely for work for the whole year to claim as a federal tax deduction. The space can’t double as anything else.
  • Note, however, that several states allow state income tax deductions for unreimbursed employee business expenses. Check with your tax advisor for specifics on your situation.

In addition, there are no stimulus check federal taxes owed on the direct payments that over 150 million Americans received as part of the CARES Act. Those who were eligible but didn’t receive a payment in 2020 may claim it as a credit on their federal tax returns.

2020 tax deductions and other rules

Here’s a summary of what you need to remember about pandemic-related tax changes and other recent legislative updates.

1. Retirement plans and withdrawal penalties

The CARES Act enabled temporary withdrawals and plan loan limits on traditional individual retirement accounts (IRA) and Roth IRAs. Here’s what you need to know if you took advantage of these options.

  • Repayment of coronavirus-related distributions: The CARES Act allowed penalty-free, coronavirus-related distributions up to $100,000 between January 1 and December 31, 2020, if allowed by the plan. Repayment of these are permitted within three years of taking the distribution, and taxation can be spread over a three-year taxation period.
  • Loan repayments: Plan loan limits for qualified participants were temporarily increased to the lesser of $100,000 or 100% of the participant’s vested balance, if adopted by the plan. Qualified individuals could also delay certain loan repayments due in 2020, with subsequent payments adjusted to account for the delay and additional accrued interest.

Remember: There are no additional taxes due if you repay a loan from your 401(k) account according to its terms. However, if you have lost your job, the outstanding loan balance is generally due in full when you leave, and any remaining balance and accrued interest that isn’t paid off may be subject to taxes and penalties.

Learn more: Retirement savings can help lower your taxable income.

2. Standard 2020 tax deductions

The Tax Reform Act of 2017 (2017 act) nearly doubled the standard deduction. These amounts are now $12,550 for single filers, $18,800 for head-of-household filers, and $25,100 for married couples filing jointly.

Learn more: Credits and deductions for individuals.

3. Changes in this year’s tax withholdings

The IRS recommends checking your tax withholding every year or when a big life event happens. That’s especially true for 2020, when many may have lost jobs or income due to the COVID-19 pandemic and recession. If you got a second job, changed jobs, or your spouse changed jobs this year, you may want to re-evaluate your withholdings, which can impact your tax refund or taxes due. And after you’ve reviewed your withholding, it may help to re-evaluate your retirement contributions.

Curious about the long-term benefit of putting a little extra toward your retirement savings? Enter three numbers into our Retirement Wellness Planner and you’ll get a score that lets you know how you’re doing toward your retirement savings goals. A simple adjustment helps you see the potential of contributing just 1% more from your paycheck.

4. Elimination of personal exemptions

You used to be able to claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents to lower your taxable income. This exemption was eliminated in the 2017 tax bill in favor of increasing the standard deduction. (See No. 2 above.)

5. State and local tax deduction limitations

Assuming you itemize deductions, you can now take a $10,000 maximum deduction—$5,000 if married filing separately (MFS)—on any combination of state and local income, real estate, and personal property taxes. Alternatively, you may elect to substitute state and local sales taxes for income taxes, but you can’t use both.6

6. Mortgage interest deduction limit

The 2017 tax bill set a cap on the total amount of mortgage debt for which you can deduct mortgage interest paid: up to $750,000 ($375,000 if MFS) if you take out a new loan for a first or second home between December 15, 2017, and December 31, 2025. If the tax act isn’t extended, the cap will revert to total mortgage debt of $1,000,000 ($500,000 if married filing single).

If you already have a mortgage, your debt is grandfathered, and you can refinance without losing the $1,000,000 cap, if you don’t increase the debt by refinancing. However, if you have a grandfathered mortgage and acquire a second home, the new cap will apply to limit the second home mortgage to the $750,000, less the grandfathered mortgage up to $750,000.

New mortgage interest deduction cap: Grandfathered mortgage + second home and/or purchase of a new home = $750,000

Interest from home equity loans is no longer deductible, regardless of when you took out the loan.

7. Exclusion for sale of your primary home

If you decide to sell your primary residence, and you’ve lived there for two of the last five years, single filers can still exclude up to $250,000 (married couples up to $500,000) from capital gains taxes (a tax levied on profits you make when you sell for a price higher than what you originally paid, plus the cost of upgrades other than simple maintenance and repairs).

8. Child tax credit (CTC)

The credit doubled to $2,000 per child until age 17. For lower income taxpayers, up to $1,400 of this credit is refundable in cash per child.

The CTC is also available to more households. You can claim the full CTC if your adjusted gross income (AGI) is $200,000 or less for single parents, and $400,000 AGI or less for married couples. You can also take a $500 credit if you support a dependent who is not a child (e.g., elderly parent who depends on you for care, an adult child with a disability).

9. Alternative minimum tax (AMT)

The 2017 act kept the AMT but reduced the number of people impacted by raising the income exemptions.

For this year’s filing it’s $73,600 for single or head of household, and $114,600 for married filing jointly or widow(er).7

10. Estate tax exemption

The amount of money exempt from the estate tax doubled.

For this year those numbers are $11.7 million for a single filer or $23.4 million for a married couple.8

Since only 0.2% of all estates are large enough to be hit by estate taxes, this only applies to a small number of people.

Get a head start on filing 2020 taxes

To alleviate some of the stress that comes with filing your taxes, start getting your tax-related forms and information pulled together in one spot. Note any big life events that could impact your taxes—getting married, divorced, having a child, or buying a home—and have those documents handy, too.

Have more tax questions? Our tax FAQs can help point you in the right direction. Then connect with your tax professional.

Next steps

  • Get our 2021 tax guide (PDF) as you look into next year's planning.
  • Ask for help. When it comes to tax time, a financial professional will talk you through what you need to know. Don’t have one? Ask your HR department if your employer’s retirement plan offers this service. Or, we can help you find one.

1 Change will likely sunset after 2025 and revert to its 2017 numbers, adjusted for inflation. These rates are imposed on taxable income, meaning income remaining after applicable exclusions, deductions and exemptions are claimed. Note that each rate applies only to income falling within that bracket. For additional information and other filing status’ and brackets go to irs.gov.

2 https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021

3 https://www.pgpf.org/blog/2020/09/how-many-coronavirus-stimulus-checks-have-been-sent-out-so-far

4 https://www.aarp.org/money/taxes/info-2020/are-stimulus-checks-taxed.html

5 https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2020

6 https://www.irs.gov/taxtopics/tc503#:~:text=Overall%20Limit,your%20other%20itemized%20deductions%20also

7 https://taxfoundation.org/2020-tax-brackets/

8 https://www.taxpolicycenter.org/briefing-book/how-do-estate-gift-and-generation-skipping-transfer-taxes-work

Tyler DeHaan is a Registered Representative of Principal Funds Distributor, Inc.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel, financial professional or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Be sure to also confirm your State filing and payment deadlines as they may not align with the extended federal filing deadline. Review IRS.gov for all filing status’.

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An individual would have to be affected by COVID-19 according to the CARES Act - A coronavirus-related distribution is a one made to an individual:  (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.