Tax Prep Dispatch: What's New for 2020?

This time of year, as we return from our luxury cruises and months of summer recreation, we find ourselves wondering: What’s new for the next filing season?

This Dispatch discusses the new tax law – there’s not much – and changes to VITA tax return scope – and there’s also not much. 

New Numbers

As usual, income and credit amounts for the earned income tax credit have increased.

Thanks to the folks at Center on Budget and Policy Priorities, we can see a visual representation of the new EITC amounts.

Standard Deduction

The standard deduction amounts and the gross income test for a qualifying relative have increased. The exemption amount remains zero.

Mileage Rates

Most of the standard mileage rates have increased for tax year 2019.

Child Tax Credit & Credit for Other Dependents

The amounts for the child tax credit and credit for other dependents have not changed. 

Tax Law Changes

VITA Basic Level

Really, nothing much changed for tax year 2019 Basic returns. But one item that was part of the Tax Cut and Jobs Act didn’t go into effect until tax year 2019. 

Alimony Income and Alimony Adjustments

For any divorce decree (or separate maintenance agreement) executed or modified after December 31, 2018:

  • The alimony payments are not included in income by the recipient of the payments.
  • The alimony payments are not deductible by the taxpayer who paid the alimony. 

Comment: In other words, for taxpayers who got divorced (or modified their divorce) during 2019, the alimony is not reported on the tax return of either ex-spouse. All other divorced taxpayers receiving or paying alimony report it the same way they always have.

Alimony Example

Tootsie and Trudy have been best friends for over 30 years and they do everything together. In fact, they both got divorces last winter and each of them is getting $18,000 alimony every year. Tootsie’s divorce was finalized just before Christmas 2018 and Trudy’s was finalized January 4, 2019. 

Tootsie will have to report her $18,000 alimony income on her 2019 Form 1040. Trudy is not required to report any of her alimony income. 

Affordable Care Act

One aspect of the Affordable Care Act has changed. The Individual Shared Responsibility Payment is zero for tax year 2019.

Sounds simple, but what does it mean?

  • No more penalty for not having health insurance.
  • Preparers don’t need to know whether the taxpayer and family members had insurance – except to ask if anyone had insurance from the Marketplace. 
  • The whole ACA chart at the top of page 3 of the Form 13614-C is gone.
  • No more trying to figure out health insurance exemptions for Form 8965, Health Coverage Exemptions. 

Affordable Care Act Example

Clayton, a single millennial, is already 28 years old and he still hasn’t gotten any health insurance. Last year when he filed his tax return, he had to pay a $695 penalty. Clayton does not need to report anything about health insurance on his 2019 return and he will not have to pay any penalty.

Comment: Tax preparers still need to ask if taxpayers had insurance through the Marketplace and if they did, Form 1095-A is needed for reconciliation of the Premium Tax Credit on Form 8962, Premium Tax Credit, which is an Advanced issue.

Extenders

Remember the extenders? Extenders are items of tax law that expired. They are called extenders because in the past, such items were usually extended by Congress; that is, the expiration date was extended to at least one more tax year. But in recent years, the extenders haven’t been extended. The law actually expired.

The Bipartisan Budget Act of 2019 extended the following tax breaks only through December 31, 2017. They were not available for tax year 2018 and it appears that they will not be available for tax year 2019.

  • Adjustment for qualified tuition & fees
  • Credit for nonbusiness energy property (residential energy credit)

Volunteers will be notified if Congress passes some last-minute legislation to change the status of the extenders.

Basic Level Summary

Not much has changed for Basic returns. But last year there were important changes to the child tax credit and there was a new credit for other dependents. It would be wise for volunteers to go back and review the training material on these topics. 

VITA Advanced Level

For taxpayers who itemize, the medical expense deduction threshold for tax year 2019 is 10% of adjusted gross income. The lower 7.5% AGI threshold has expired.
 
Extenders: The Bipartisan Budget Act of 2019 extended the following provisions only through December 31, 2017. They are expired for tax year 2019.

  • Exclusion from gross income of qualified principal residence indebtedness
  • Mortgage insurance premiums deductible on Schedule A as qualified residence interest

Advanced Level Summary

That’s it for changes to Advanced issues. But the new QBID (qualified business income deduction) that was effective starting with tax year 2018 was a doozy and it hasn’t changed. For tax year 2019 there is a new Form 8995, Qualified Business Income Deduction Simplified Computation, but like last year, most of the complications regarding QBID – like type of business and wages paid – only apply to high income taxpayers. So it works the same for tax year 2019. But it would be wise for Advanced volunteers to go back and review the training material on QBID. 

Changes to VITA Scope

As usual, a few items have been added to the list of tax issues that can be addressed at VITA sites. 

Basic Level Returns

The following items were added to Basic scope for filing season 2020.

  • Form 1099-INT, Interest Income 
    • Box 10 - market discount
    • Box 11- bond premium)
    • Box 12 - bond premium on Treasury obligations
    • Box 13 - bond premium on tax exempt bonds 

Several more unusual items that are not in scope may appear on Form 1099-INT. When you see something unfamiliar, check the Scope of Service chart in Publication 4012. 

  • Form 1099-OID, Original Issue Discount
    • Box 5 - market discount
    • Box 10 - bond premium

Comment: Enter the information just as it appears on the 1099-INT or 1099-OID and the software will complete the calculations. For example, a taxpayer had bond interest income of $550 reported in box 1 of Form 1099-INT and $50 bond premium reported in box 12. The software will put $450 - the correct amount of taxable interest - on Form 1040, line 2. 

Advanced Level Returns

The following item was added to Advanced scope for filing season 2020.

  • Form 1099-PATR, Taxable Distributions Received from Cooperatives
    • There are limitations. If the taxpayer confirms that the dividends in box 1 were solely paid on items bought for personal use – not for a business - the amount of the dividend is not reported and is not included in income. No entry is required.
    • If there are any entries on Form 1099-PATR other than box 1, or if the dividends in box 1 are related to a business, then the return is out of scope.

The qualified business income deduction is still in scope for Advanced preparers. But a new tax preparation issue for tax year 2019, QBID loss carryforward, is out of scope for VITA.

  • IRS requires that the taxpayer report prior year qualified loss carryforwards on line 3 of Form 8995, Qualified Business Income Deduction Simplified Computation, even if the taxpayer is no longer in business.
  • If the taxpayer has a QBID loss carryforward (line 16 of the 2018 Qualified Business Income Deduction—Simplified Worksheet), then the 2019 return is out of scope. Generally, you would encounter this when the taxpayer had a loss on a Schedule C for the prior year.

In Closing... 

As you can see, there really isn’t much that’s new and the items that are different are issues not frequently encountered at VITA sites. But as you prepare for the next filing season, remember that there were significant changes last year. Use some of that energy gained from a restful summer break to facilitate a thorough review of the provisions of the Tax Cut and Jobs Act for all volunteers. 

Next Dispatch: New and revised forms for filing season 2020. 

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