The Internal Revenue Service recently released its updated tax deductions for 2020, including changes that come as part of the Taxpayer First Act of 2019. As a note, all changes discussed below are subject to Internal Revenue Service tax code, which is why it’s important to contact your tax professional to not only ensure compliance but also maximize these deductions.

Click here for a cheat sheet on the new tax rates by income levels.

The 2020 deduction update also includes changes to the Alternative Minimum Tax exemption and phaseout amounts, which can be found by clicking here.

The Taxpayer First Act of 2019 also increased the failure to file penalty to $330 for returns due after the end of 2019.

Below are a few notes on specific deductions to help you plan financially throughout 2020.

Estate Deductions

For an estate of a decedent dying in calendar year 2020, the basic exclusion amount is $11.58 million for determining the amount of the unified credit against estate tax.

If the executor elects to use the special use valuation method for qualified real property in a decedent’s gross estate, the aggregate decrease in the value of qualified real property resulting from electing to use Section 2032A for purposes of the estate tax cannot exceed $1.18 million.

Also worth noting is the amount used to determine interest on a certain portion of the estate tax payable in installments. The amount used to determine the “2-percent portion” (for purposes of calculating interest of the estate tax extended) is $1.57 million.

Standard Deduction

The standard deduction amounts increased slightly for taxable years beginning in 2020. The new rates are:

• Married Individuals Filing Joint Returns and Surviving Spouses: $24,800
• Heads of Households: $18,650
• Unmarried Individuals (other than surviving spouses and heads of households): $12,400
• Married Individuals Filing Separate Returns: $12,400

The standard deduction for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 or the sum of $350 and the individual’s earned income.

The additional standard deduction amount for the aged or the blind is $1,300, which increases to $1,650 if the individual is also unmarried and not a surviving spouse.

Unearned Income of Minor Children – the “Kiddie Tax” (For taxable years beginning in 2020)

The amount used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax” is $1,100. The same $1,100 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.”

For example, one of the requirements for the parental election is that a child’s gross income is more than the amount referenced but less than 10 times that amount; thus, a child’s gross income for 2020 must be more than $1,100 but less than $11,000.

Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie Tax”

For a child to whom the “kiddie tax” applies, the exemption amount for purposes of the alternative minimum tax may not exceed the sum of the child’s earned income for the taxable year, plus $7,900.

Maximum Capital Gains Rate (For taxable years beginning in 2020)

The Maximum Zero Rate Amount is $80,000 in the case of a joint return or surviving spouse ($40,000 in the case of a married individual filing a separate return), $53,600 in the case of an individual who is a head of household, $40,000 in the case of any other individual (other than an estate or trust), and $2,650 in the case of an estate or trust.

The Maximum 15% Rate Amount is $496,600 in the case of a joint return or surviving spouse ($248,300 in the case of a married individual filing a separate return), $469,050 in the case of an individual who is the head of a household, $441,450 in the case of any other individual (other than an estate or trust), and $13,150 in the case of an estate or trust.

Annual Exclusion for Gifts (For calendar year 2020)

• The first $15,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.
• The first $157,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.

Adoption Credit (For taxable years beginning in 2020)

The credit for adopting a child with special needs is $14,300. The maximum credit for other adoptions is the amount of qualified adoption expenses up to $14,300. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $214,520 and is completely phased out for taxpayers with modified adjusted gross income of $254,520 or more.

Adoption Assistance Programs

The amount that can be excluded from an employee’s gross income for adopting a child with special needs is $14,300. The maximum amount that can be excluded from an employee’s gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee is $14,300. The amount excludable from an employee’s gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $214,520 and is completely phased out for taxpayers with modified adjusted gross income of $254,520 or more.

Child Tax Credit (For taxable years beginning in 2020)

The maximum refundable credit is $1,400.

Lifetime Learning Credit (For taxable years beginning in 2020)

Taxpayers will use a modified adjusted gross income in excess of $59,000 ($118,000 for a joint return) to determine the reduction in the amount of the Lifetime Learning Credit.

Employee Health Insurance Expense of Small Employers (For taxable years beginning in 2020)

The amount, used for limiting the small employer health insurance credit and for determining eligible small employers, is $27,600.

Certain Expenses of Elementary and Secondary School Teachers (For taxable years beginning in 2020)

An eligible educator can deduct up to $250 for expenses paid or incurred related to books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials.

Cafeteria Plans (For taxable years beginning in 2020)

The limitation on voluntary employee salary reductions for contributions to health flexible spending arrangements is $2,750.

Qualified Transportation Fringe Benefit (For taxable years beginning in 2020)

The monthly limitation is $270, which is the same for qualified parking.

Income from U.S. Savings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses (For taxable years beginning in 2020)

The exclusion begins to phase out for modified adjusted gross income above $123,550 for joint returns and $82,350 for all other returns. The exclusion is completely phased out for modified adjusted gross income of $153,550 or more for joint returns and $97,350 or more for all other returns.

Gross Income Limitation for a Qualifying Relative (For taxable years beginning in 2020)

The exemption amount referenced is $4,300.

Election to Expense Certain Depreciable Assets Under Section 179 (For taxable years beginning in 2020)

The aggregate cost of any property a taxpayer elects to treat as an expense cannot exceed $1.04 million and the cost of any sport utility vehicle that may be taken into account cannot exceed $25,900. The $2.59 million limitation is reduced (but not below zero) by the amount the cost of property placed in service during the 2020 taxable year exceeds $2,590,000.

Qualified Business Income Under Section 199A (For taxable years beginning in 2020)

The threshold amount is $326,600 for married filing joint returns, $163,300 for married filing separate returns and $163,300 for all other returns.

Medical Savings Accounts (For taxable years beginning in 2020)

• Self-only coverage: The term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,350 and not more than $3,550, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,750.
• Family coverage: The term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,750 and not more than $7,100, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,650.

Interest on Education Loans (For taxable years beginning in 2020)

The $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income in excess of $70,000 ($140,000 for joint returns) and is completely phased out for taxpayers with modified adjusted gross income of $85,000 or more ($170,000 or more for joint returns).

Limitation on Use of Cash Method of Accounting (For taxable years beginning in 2020)

A corporation or partnership meets the gross receipts test for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $26 million.

Threshold for Excess Business Loss (For taxable years beginning in 2020)

In determining a taxpayer’s excess business loss, the amount is $259,000 ($518,000 for joint returns).

Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns (For taxable years beginning in 2020)

• Low cost article: For purposes of defining the term “unrelated trade or business” for certain exempt organizations, “low cost articles” are articles costing $11.20 or less.
• Other insubstantial benefits: The $5, $25 and $50 guidelines for the value of insubstantial benefits that may be received by a donor in return for a contribution, without causing the contribution to fail to be fully deductible, are $11.20, $56 and $112, respectively.

Tax on Insurance Companies Other than Life Insurance Companies (For taxable years beginning in 2020)

The amount of the limit on net written premiums or direct written premiums (whichever is greater) is $2,350,000 to elect the alternative tax for certain small companies to be taxed only on taxable investment income.

Foreign Earned Income Exclusion (For taxable years beginning in 2020)

The foreign earned income exclusion amount is $107,600.

Debt Instruments Arising Out of Sales or Exchanges (For calendar year 2020)

A qualified debt instrument has stated principal that does not exceed $6,039,100, and a cash method debt instrument under Section 1274A(c)(2) has stated principal that does not exceed $4,313,600.

Reporting Exception for Certain Exempt Organizations with Nondeductible Lobbying Expenditures (For taxable years beginning in 2020)

The annual per person, family or entity dues limitation to qualify for the reporting exception, regarding certain exempt organizations with nondeductible lobbying expenditures, is $119 or less.

Notice of Large Gifts Received from Foreign Persons (For taxable years beginning in 2020)

The Treasury Department and the Internal Revenue Service requires recipients of gifts from certain foreign persons to report these gifts if the aggregate value of gifts received in the taxable year exceeds $16,649.

Do you need help navigating tax deductions or planning for success? Our tax team is ready to help!

About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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