Updated: Dec 13, 2020
As the end of 2020 quickly approaches, I have taken some time to read up on important tax changes that will impact the 2021 filing season.
Not just tax nerds will find these changes interesting so keep reading! In all likelihood at least one of the updates impacts you.
Here are some of the biggest changes you’ll see:
New tax form for independent contractors
Independent contractors and other self-employed individuals will now receive Form 1099-NEC in place of Form 1099-MISC for reporting non-employee compensation.
New Form 1099-NEC is solely devoted to non-employee compensation, unlike Form 1099-MISC which reports information on other forms of income such as rents, royalties, and crop insurance proceeds.
Businesses are only required to send you Form 1099-NEC if they paid you more than $600 for the year.
Even if you do not receive Form 1099-NEC any payments you receive for work performed is considered income and should be reported on your tax return.
Make donations before the end of the year
The CARES (Coronavirus Aid, Relief, and Economic Security) Act allows taxpayers who normally take the standard deduction to deduct up to $300 in charitable contributions they made in 2020. Making donations to qualified 501(c)3 organizations can make a thoughtful gift this holiday season that will keep on giving when you file your tax return. Make sure to keep documentation.
Traditional IRAs are more flexible
The SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 introduced a number of provisions that offer more flexibility to traditional IRAs.
· The new law eliminates the long-standing 70 ½ age limit for making contributions into a traditional IRA. The new rule allows people still working or running a business to continue to set aside funds until they officially retire.
· The age at which required minimum distributions (RMDs) from traditional IRAs must begin increased from 70 ½ to 72 years of age.
Retirement distributions for childrearing and adoption
The SECURE Act also now allows penalty-free withdrawals from retirement plans for individuals in the event of childbirth or adoption.
Starting in 2020, IRA owners or participants in workplace retirement plans like a 401(k) or 403(b) plan, can now withdraw up to $5,000 for the birth or a child or an adoption without being subject to the typical 10% additional penalty for early withdrawals.
The withdrawal must take place within a year of the birth or finalized adoption.
Withdrawals from defined benefit plans are not eligible.
Expansion of 529 Plan uses
Section 529 Plans underwent some expansion to include more eligible expenses.
· Amounts can be withdrawn to cover principal and interest of student loans for the beneficiary or their sibling. Distributions used to cover loan repayments are limited to $10,000 for an individual’s lifetime. No double dipping is allowed so any student loan interest paid with these funds cannot be used as part of the student loan interest deduction.
· Section 529 Plans can now be used to pay for apprenticeship programs that are registered with the Department of Labor. Funds from 529 plans can pay for books, tuition and fees, and equipment required for the program. The growing flexibility of 529 plans allows families to consider and pay for the educational path best for the student.
Consider contacting your tax professional to see how these changes will impact you or your family’s unique circumstances.