Tax rules change every year, but 2020 has seen more changes than most. There have been a lot of new laws and programs aimed at pandemic relief that you may have heard of, but there have also been some less well publicized tax law changes that you might be able to take advantage of. Here are a few.
Make up to $300 of charitable contributions. For the 2020 tax year only, an above-the-line deduction of $300 is available to all Americans ($600 for married filing jointly returns) who want to make a charitable contribution. You can donate to more than one charity, but the total amount of contributions must be $300 or less to be able to take an above-the-line deduction. While you will still need to itemize your deductions if you want a tax break for donations greater than $300, this above-the-line deduction for $300 or less helps alleviate the elimination of the charitable deduction for most taxpayers.
How to take advantage of this change: Donate $300 to your favorite charitable organization or organizations by December 31, 2020. You must receive a written acknowledgment from the recipients of the donations to which you made the $300 contribution before filing your 2020 tax return.
Donate up to 100% of your income. The normal contribution limit of 60% of your income is suspended for 2020, allowing you to contribute as much of your income as you want to various charities.
How to take advantage of this change: Not a lot of people are going to be able to take advantage of this, but this rule change is meant to help struggling charities during the pandemic. If you are considering additional giving, you must make your charitable contributions by December 31, 2020, and must obtain written acknowledgment from each charity you made a donation to before filing your 2020 tax return.
Use retirement savings to pay for birth or adoption expenses. Adding a child to your family can be very expensive. To help with these costs, you can now withdraw up to $5,000 per parent from your retirement accounts to pay for birth and adoption expenses. While the withdrawal won’t be hit with the 10% early withdrawal penalty, you’ll still have to pay income taxes.
How to take advantage of this change: Consult your financial advisor or benefits coordinator to find out how to withdraw the funds from your retirement accounts. Since this withdrawal will deplete your retirement savings, first consider whether you have other sources of cash to cover expenses.
No age limit for contributing to IRAs. You can now contribute to an IRA regardless of your age as long as you have earned income. The old rule prevented you from contributing to an IRA past age 70½. The IRA contribution limit for 2020 is $6,000 if you’re under age 50 and $7,000 if you’re over age 50.
How to take advantage of this change: Consider getting a part-time job or doing some consulting work if you project that you won’t have earned income by the end of 2020. You can use this earned income to fund your traditional or Roth IRA.