Davis Tax Services, LLP

Tax planning, preparation & problem resolution

Tax highlights for 2020 tax year

Special $300 tax deduction for charitable contributions
Individuals who take the standard deduction may claim up to $300 for charitable cash contributions made in 2020 or 2021. Normally, taxpayers who use the standard deduction cannot claim a deduction for their charitable contributions.
Contributions that qualify for Arizona credits cannot be counted for the $300 federal deduction.
For those who do itemize, the income limits for charitable contributions are suspended for 2020. The maximum deduction for donations normally is from 20% to 60% of the taxpayer's adjusted gross income (AGI), but has been raised to 100% of AGI for 2020.
And don't forget the dollar-for-dollar Arizona tax credit charities. For most, you can donate up to Apr. 15 and deduct on last year's return. Find out more at https://davis-tax.com/azcredits.php
No RMD's required
If you have a tax-sheltered retirement plan (traditional IRA or 401k) that has required minimum distributions (RMD's), two changes this year will benefit you.
First, for people who haven't started taking RMD's yet, the age to begin has moved back for 70½ to 72. (A bill proposed in Congress would raise the age even further, to 75.) Taxpayers who don't need to rely on that income can let it build up a bit longer.
Secondly, the requirement to take minimum distributions has been suspended for 2020, also allowing funds to grow if not needed now. Of course, you can always withdraw money as you need it, RMD's or not.
Maximum age for traditional IRA contributions
The SECURE Act removed the maximum age for contributing to traditional Individual Retirement Accounts. In the past, contributions could only be made until age 70½. Now, anyone who is working (has "earned income") may contribute to an IRA regardless of age.
New Form 1099-NEC
If you have gotten a 1099-MISC form for self-employment income (independent contractor), you'll see a new form this year the 1099-NEC. It should be in your hands and to the IRS by Jan. 31.
The 1099-NEC reports only nonemployee compensation, what had been in Box 7 of the 1099-MISC. The 1099-MISC will still be used to report rents, direct sales and other income.
If you need to prepare 1099-NEC's for your business (payments over $600), I can handle that for you.
IRS cuts mileage rates for 2021
For 2021, the IRS has reduced the standard mileage rate for business purposes by 1½¢ to 56¢ per mile. Driving for medical care is 16¢ per mile, down a penny from the 2020 rate.
The rate for driving for charitable service stays at 14¢. Moving expenses are no longer deductible, except for active duty military changing posts.
EIP's
Those $1,200 Economic Impact Payments (EIP) sent out last spring and summer as well as the EIP's issued in January 2021 -- they are not taxable. However, they will be reported on your 2020 return, so if you didn't receive it last year you will get a credit on your tax return.
Expired provisions
A number of tax provisions expired at the end of 2020 and Congress has not yet been extended them. Some key ones:
  • Mortgage insurance premiums deduction
  • Tuition and fees deduction for college (permanently elminiated in the Dec. 27 law)
The Consolidated Appropriations Act 2021, signed into law Dec. 27, extended numerous expiring provisions including:
  • Medical expense deduction threshold permanently reduced to 7½% from 10%
  • Exclusion from gross income for discharge of debt income from qualified principal residence debt ("home foreclosure forgiveness") extended for five years, 20121-2025.
  • Residential energy-efficient property credit and solar tax credit were extended for two years.
Electronic filing normally opens around Jan. 20, but may be delayed slightly this year due to the IRS processing the second round of stimulus checks in January. IRS at this point intends to keep to Apr. 15 for filing deadline this year.