Tax time is right around the corner, and you want to set yourself up for success both during and after your file. This requires planning on your part, and due diligence as this return will differ from last year’s.
Just like maintaining your physical health, your financial health also requires your attention and effort. Federal income taxes have several aspects that change year to year due to inflation. This includes everything from retirement account contribution limits to standard deductions. Here, we will outline how this year’s tax return will vary from last year, and give you tips to enhance your financial fitness for 2020!
Six Ways Taxes Change in 2020
Chances are, not all of the following will pertain to you, but it’s good practice to know them regardless as the IRS does make you pay for any mistakes made.
- The IRS Cut the Alimony Deduction
The Tax Cuts and Jobs Act eliminated the alimony deduction for 2020. According to IRS Publication 5307, you can’t deduct alimony payments for separation or divorce agreements made or modified for this year.
So, any person who got divorced in 2019 and paid alimony to their ex-spouse won’t be able to write off these payments on their 2020 return. However, this also means that the divorced spouse that received alimony payments can’t count these payments as their income.
- The Individual Mandate Penalty is Gone
In 2019, the shared responsibility payment took effect. Also called the individual mandate penalty, it applied to people who were required to carry health insurance under the Affordable Care Act. These people didn’t qualify for an exemption, and they didn’t get insurance, so the IRS penalizes them.
If you had this penalty, you paid a fee when you paid your annual taxes. Starting in 2019, you won’t have to pay a penalty for your 2020 taxes if you didn’t carry valid health insurance
- Increased Contribution Limits of HSAs
Health savings accounts are a tax-advantaged account that allows for contribution limit increases over the years. You can use them for retirement accounts, but they’re not earmarked for this alone. The contribution limits increased for this year for people with high-deductible insurance policies. The new amounts are:
- Individual Coverage – $3,500 ($50 increase from 2018)
- Family Coverage – $7,000 ($100 increase from 2018)
- Increased Contribution Limits for Retirement Accounts
During 2019, you could put more money in several different types of retirement accounts than before. You could deduct these contributions on your next year’s return, and this includes contributions you made to traditional IRAs and traditional 401k plans. The new contribution limits are:
- 401k Base Limit – $19,000 ($500 increase)
- 401k Catch-Up Contribution for 50 and Older – Additional $6,000 (no changes)
- IRA Base Limit – $6,000 ($500 increase)
- IRA Catch-Up Contribution for 50 and Older – Additional $1,000 (no changes)
- Increased Income Brackets
The income brackets increased slightly from last year. The IRS released their new brackets earlier in the year for 2019, and the following is for single filers and married couples filing jointly:
- 10% – $9,700 and below ($19,400 for married, filing jointly)
- 12% – $9,701 to $39,475 ($19,400 to $78,950 for married, filing jointly)
- 22% – $39,476 to $84,200 ($78,951 to $168,400 for married, filing jointly)
- 24% – $82,201 to $160,725 ($168,401 to $321,450 for married, filing jointly)
- 32% – $$160,726 to $204,100 ($321,451 to $408,200 for married, filing jointly)
- 35% – $204,101 to $510,300 ($408,201 to $612,350 for married, filing jointly)
- 37% – $510,301 and up ($612,351 and up for married, filing jointly)
- Increased Standard Deduction Levels
Due to inflation, the IRS raised the standard deduction levels. These deduction amounts reduce your liability by lowering the amount of income you pay federal taxes on according to your filing status. So, if a head of household filed a return, the first $18,350 of their income would not be subject to federal taxes. As they currently stand for the year, you’ll be able to deduct:
- Head of Household – $18,350 ($200 increase)
- Single – $12,200 ($200 increase)
- Married, Filing Jointly – $24,400 ($400 increase)
- Married, Filing Separately – $12,200 ($200 increase)
Planning for Financial Fitness in 2020 – Four Tips
There are several things you can do to improve your financial health going forward. As a bonus, you’ll feel more confident and prepared when it comes time to file your taxes, and you’ll be ready if the IRS decides to audit you.
Tip One – Keep Updated on Law Changes Regarding Taxes
It’s essential that you keep up with the IRS’s newest changes from year to year. In 2017, a new Act brought in several changes to taxes in general, and we outlined the big ones earlier. For example, it doubled standard deduction amounts while reducing several rates. The biggest changes you’ll see this year include:
- No penalty for not carrying health insurance
- Can’t deduct alimony from a 2019 divorce, nor can you claim alimony payments as income
- The threshold for deducting your dental and medical expenses went up to 10% of your adjusted gross income. This makes it harder to deduct them.
Tip Two – Take Advantage of Traditional Retirement Accounts
When you invest in your retirement, you want to do so using tax-advantaged accounts. The most popular accounts are 401(k)s and IRAs. You can contribute money on a pre-tax basis. In turn, this reduces your taxable income.
Roth retirement accounts are slightly different, but they offer a back-end break. You contribute to this account on an after-tax basis, but you’ll be able to withdraw money from your account later on without paying taxes on it.
Tip Three – Ask Your Employer About an Employee Assistance Program
Some employers offer an Employee Assistance Program for their employees. This program can offer professional and FREE services to help employees with their taxes. If your employer offers it, make an appointment. They can help you file, help with deductions, and much more.
Tip Four – Get Organized
If you haven’t already been planning, you may feel behind on getting organized for this year’s filing deadline, but you can start getting in the habit now. Organization is the key for financial fitness, and it’s relatively easy to do. The IRS can audit you up to six years in some circumstances, but three years is the normal limit. To prepare, you want to have:
- 1099 forms (for income or dividends paid to you)
- 1099-G form (deducting local or state taxes)
- Any receipts for travel expenses for business purposes
- Car mileage log (business use)
- Credit card statements and bank statements (to verify deductions)
- Home mortgage payment stubs or home purchase closing statement
- Medical bills (especially if they exceed 10% of your income)
- Mobile phone bills
- Pay stubs for the year
- Receipts from any charity
- Receipts from anything you might claim as an itemized deduction
Planning for your annual taxes should be something you keep in mind all year round. These tips and changes will help you stay ahead of your taxes, and will get you on the road to healthier finances in 2020 and beyond.