The end of the year is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Here are some important points to remember.

Personal Exemptions

Personal exemptions are eliminated for tax years 2018 through 2025.

Standard Deductions

The standard deduction for married couples filing a joint return in 2020 is $24,800. For singles and married individuals filing separately, it is $12,400, and for heads of household the deduction is $18,650. The additional standard deduction for blind people and senior citizens in 2020 is $1,300 for married individuals and $1,650 for singles and heads of household.

Income Tax Rates

In 2020 the top tax rate of 37% affects individuals whose income exceeds $523,600 ($628,300 for married taxpayers filing a joint return). Marginal tax rates for 2020 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As a reminder, while the tax rate structure remained similar to prior years under tax reform (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status.

TAX CREDITS

Child and Dependent Care Credit

The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained under tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35% of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35% of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20%, regardless of the amount of adjusted gross income.

Child Tax Credit and Credit for Other Dependents

For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child. The refundable portion of the credit increases from $1,000 to $1,400 (15% of earned income above $2,500, up to a maximum of $1,400) so that even if taxpayers do not owe any tax, they can still claim the credit. We can provide details related to your specific income situation.

Under TCJA a new tax credit, Credit for Other Dependents, is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.

EDUCATION EXPENSES

American Opportunity Tax Credit

For 2020, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Lifetime Learning Credit

A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2020, the modified adjusted gross income (MAGI) threshold at which the Lifetime Learning Credit begins to phase out is $114,000 for joint filers and $57,000 for singles and heads of household. The credit cannot be claimed if your MAGI is $67,000 or more ($134,000 for joint returns).

Employer-Provided Educational Assistance

As an employee in 2020, you can exclude up to $5,250 of qualifying postsecondary and graduate education expenses that are reimbursed by your employer.

Student Loan Interest

In 2020, you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels.

RETIREMENT

Contribution Limits

For 2020, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,500 ($19,000 in 2019). For persons age 50 or older in 2020, the limit is $26,000 ($6,500 catch-up contribution).

Special for 2020:

Taxpayers can skip their required minimum distributions (RMDs) for 2020. In addition, taxpayers who turned 70-1/2 in 2019 and delayed taking their RMD until April 1, 2020, can skip taking that RMD also. In addition, if a taxpayer has already taken a distribution in 2020 that was considered an RMD, the taxpayer has 60 days from the date of the distribution to roll it back into an eligible retirement plan.

Even though a taxpayer can skip taking an RMD for 2020, the taxpayer might want to consider taking a distribution anyway because tax rates in 2021 might be higher than in 2020 to pay for COVID relief.

“Recovery Rebate Credit”

For 2020, eligible individuals are allowed a refundable income tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child under age 17. The credit is reduced by 5% of the amount by which the taxpayer’s 2020 adjusted gross income exceeds $75,000 ($150,000 for joint filers; $112,500 for heads of household), but not below zero.

The IRS automatically made advance payments (Economic Impact Payments or EIPs) of the recovery rebate credit to qualified eligible individuals during 2020. This includes individuals who filed a tax return in 2018 or 2019 and individuals receiving government benefits such as Social Security Income, Social Security Disability Income, Veterans Compensation and Pension, and Railroad Retirement. Eligible individuals who weren’t in one of the automatic payment categories were encouraged to use the IRS’s Nonfiler Tool before Nov. 21, 2020 to register to receive an EIP.