10 Things You Need to Know About Your 2020 Tax Return

Use the Recovery Rebate Credit Worksheet that comes with your federal tax return to figure how much of a credit, if any, you're eligible for. The 21-line worksheet looks intimidating, but it's worth the effort if you're missing money. No itemization is required. The amount from the worksheet goes on line 30 of your 1040 form.

4. And those stimulus checks aren't taxable

According to the IRS, stimulus payments are not considered income and no tax is owed on the money. Stimulus payments are also not considered income for purposes of determining eligibility for federal benefits or assistance programs.

5. But your unemployment checks may be taxable

Unemployment benefits were a lifeline for many who lost their jobs last year during the pandemic. Unfortunately, those jobless benefits are taxable — but fortunately, up to $10,200 of 2020 unemployment benefits is exempt from federal income tax for households with an adjusted gross income under $150,000. Married couples who got unemployment payments can each exclude $10,200 of unemployment benefits.

When you signed up for unemployment benefits, you had the option to have taxes withheld. Whether you did or not, you'll receive a Form 1099-G, “Certain Government Payments,” which will show the amount of unemployment benefits you received in 2020 and how much, if anything, was withheld for taxes. Any severance pay you received last year is also taxable.

Depending on your income and the number of dependents you have, you may be eligible for the Earned Income Tax Credit (EITC), which could reduce the taxes you owe, dollar for dollar, by as much as $6,660. Like the Recovery Rebate Credit, the EITC is a refundable credit, which means that you’ll get the full amount of the credit you’re eligible for, even if you had no income and even if it results in a refund.

6. Are you 65 or older? Enjoy a bigger standard deduction

In order to itemize deductions, you need to have more in deductions than the standard deduction, which everyone gets. For the 2020 tax year, the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly, which is up from the $12,200 for individuals and $24,400 for married couples in 2019. It's $18,650 for heads of households, which is up $300 from 2019.

Taking the generous standard deduction isn't the worst thing in the world: If you rented your home or didn't have a pile of other deductions, your standard deduction is probably more than you would get by itemizing. And taking the standard deduction means you don't have to keep a shoebox full of receipts all year.

The standard deduction for 2020 gets even better for age 65-plus taxpayers. Married taxpayers born before Jan. 2, 1956, whether filing jointly or separately, get an extra $1,300 apiece added to their standard deductions. The additional standard deduction is $1,650 for singles and heads of households. You are also eligible for the same additional standard deduction amounts if you are blind and younger than 65. If you are over 65 and blind, the amounts double.

7. Taxpayers age 65-plus also enjoy their own tax return

Calculating the bigger standard deduction is made easier with Form 1040-SR, “U.S. Tax Return for Seniors.” The special tax return for those 65 and older includes a simple-to-use standard deduction chart at the bottom of the form that shows the amount of the bigger standard deduction based on your filing status and how many boxes you check for age and blindness. And for those who still use paper forms — electronic filing is highly recommended for speed and security — the 1040-SR form is much easier to read than the standard 1040, thanks to a larger font size for the text.

8. There's good news about medical expense deductions

You need two things to deduct medical expenses. First, all of your itemized deductions, including eligible medical deductions, need to add up to more than the standard deduction. Second, you can deduct only medical expenses that are above a specified threshold of your adjusted gross income (AGI). The temporary current threshold of 7.5 percent, which was scheduled to return to 10 percent in 2021, has now been made permanent, thanks to the pandemic. The permanent 7.5 percent threshold was included in stimulus-related legislation signed into law on Dec. 27.

A remarkably large number of unreimbursed expenses are eligible for the medical deduction in order to help get you above the 7.5 percent threshold — aside from the usual out-of-pocket fees you pay to doctors and dentists. You can deduct the costs of nursing home care, for example, provided that medical services are the main reason for being in the nursing home. You can also deduct acupuncture sessions, smoking cessation programs, false teeth and some insurance premiums.

9. There's also good news about charitable deductions

If you miss taking the deduction for charitable giving because you can't overcome the bigger standard deductions that were implemented in 2018 by tax reform legislation, you're not alone. The charitable deduction was an incentive that helped funnel a great deal of money into charities.

To ease their suffering a bit, Congress allowed anyone who takes the standard deduction to deduct up to $300 in cash donations (which includes currency, checks, credit or debit cards, and electronic fund transfers) made to charities in 2020 directly on their 1040s — no itemizing required. The $300 maximum is per “tax unit,” which means you can only deduct $300, no matter whether you're filing a joint return or a single return. It gets better in the 2021 tax year, when those filing jointly can get a maximum deduction of $600 — $300 per spouse.

10. Mind your Social Security payroll taxes

The IRS issued guidance last August that gave employers the option to defer collection of employees’ portions of Social Security payroll taxes between Sept. 1 and Dec. 31, 2020. The idea was to give workers a bit more in their paychecks during that four-month stretch in order to help ease the impact of the COVID-19 crisis. Employees originally were required to repay the deferred taxes this year by April 30, either in a lump sum or incrementally through increased paycheck withholdings.

You'll still have to repay any payroll taxes deferred in 2020, but Congress has given you more time to do so. Under stimulus-related legislation signed into law on Dec. 27, you'll now have until the end of 2021 to repay the deferred Social Security payroll taxes before penalties and interest start to accrue.

As a reminder, the Social Security payroll tax is 12.4 percent, with the employee paying 6.2 percent and the employer paying 6.2 percent. Self-employed workers pay the full 12.4 percent themselves. In 2020, you paid Social Security tax on income up to $137,700, an increase from the $132,900 income cap in 2019.