Tax changes you need to know about in 2020
It’s nearing the January 31 deadline when employers need to send out W-2 and 1099 forms to employees. File at least by April 15, but remember: The sooner you can file, the sooner you’ll get a return!
Regardless of when you file, it’s a good idea to know what changes the Internal Revenue Service (IRS) is going to be implementing. The IRS announced late last year the changes for 2020 taxes. We compared them below with 2019’s.
(Note: This article has been updated to reflect tax changes for the year 2020.)
1. Tax brackets adjust — as usual
As they usually do, tax brackets (aka tax rates) have been adjusted to account for inflation. Except for those individual filers with incomes larger than $518,400 and couples filing jointly with an income of $622,050 — this tax bracket remains at 37%, reads a press release from the Internal Revenue Service (IRS).
Here are the other rates:
- 35% for incomes over $207,350 ($414,700 for married couples filing jointly)
- 32% for incomes over $163,300 ($326,600 for married couples filing jointly)
- 24% for incomes over $85,525 ($171,050 for married couples filing jointly)
- 22% for incomes over $40,125 ($80,250 for married couples filing jointly)
- 12% for incomes over $9,875 ($19,750 for married couples filing jointly)
- 10% for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly)
NEXT: This deduction will rise but not as much as it did from 2017 to 2018.
2. Standard deductions rise for all filers
Standard deductions for married couples continue to go up like they did in past years. There was a huge rise in 2018 — it went from $12,700 in 2017 to $24,000 in 2018. Things have slowed down, however. Standard deductions rose several hundred bucks in 2019 — to $24,400, to be exact. For 2020, standard deductions will be $24,800, writes Darla Mercado in CNBC.
Single filers’ standard deductions will be $12,400 in 2020, up from $12,200 in 2019. “The additional standard deduction for older taxpayers and those who are blind (is) still available,” writes Mercado in CNBC. For heads of households, the standard deduction is $18,650 for 2020 — in 2019 it was $18,350, says a press release from the Internal Revenue Service (IRS).
NEXT: The Tax Cuts and Jobs Act eliminated the limit on these deductions.
3. There’s no limit on itemized deductions
The Tax Cuts and Jobs Act was a huge tax overhaul. One thing it did was eliminate the limitation on itemized deductions. That means there’s no limitation on itemized deductions in 2020, just like there wasn’t one in 2019 nor 2018, reads the IRS press release. If you’re like, “Wait a second, what’s an itemized deduction?” Scroll down to find out!
An itemized deduction is an expenditure that can be subtracted from your adjusted gross income (AGI) to reduce taxes owed, reads an entry in Investopedia. Depending on your tax situation, you might be able to pay less taxes this way, as opposed to taking a standard deduction.
NEXT: This exemption attempts to prevent the wealthy from skimping on their tax payments.
4. The Alternative Minimum Tax exemption is $72,900 for single filers
The Alternative Minimum Tax exemption (AMT) “ensures that taxpayers pay at least the minimum,” reads an entry on Investopedia. High earners could significantly reduce taxes owed without this exemption. Last year, the exemption was $71,700 for individuals and $111,700 for married joint filers. It phased out at $510,300 and $1,020,600, respectively.
“The Alternative Minimum Tax exemption amount for tax year 2020 is $72,900 and begins to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption begins to phase out at $1,036,800),” reads the IRS press release.
NEXT: Do you qualify for an Earned Income Credit?
5. Earned Income Credit goes up to $6,660
If you’ve used an Earned Income Credit (EIC or EITC), you might know that it’s supposed to be a benefit for working people with low to moderate incomes. An entry on the IRS’ website says filers must meet certain requirements and file a tax return, even if you don’t owe taxes or are not required to file. You don’t need to have children to qualify for the EIC, says the IRS’ website.
Just make sure you fill out the right tax form. Have a child? File Form 1040-A or Form 1040. No child? File a 1040-EZ, 1040-A, or 1040. Finally to the EIC changes for 2020 — it’s now $6,660 for taxpayers with three or more mini-me’s (aka children). That’s up from a total of $6,557 in 2019, says the press release from the IRS.
NEXT: Those with a long commute will get some reprieve.
6. Transportation and parking benefits rise — by $5
This is also known as “Commuter Tax Benefit.” It’s not that much, to be honest, but every dollar counts, right? In 2019, it was $265. For tax year 2020, the monthly limitation for the qualified transportation fringe benefit is now (drumroll, please!) a whopping $270. Wow, that’s up a whole $5. In 2018, the Commuter Tax Benefit was $260. Look at how far we’ve come!
Bike riders, this one is for you: “Qualified bicycle commuting reimbursements, previously allowed up to $240 per year prior to 2018, remains ineligible in 2020 as a tax-free benefit,” reads an entry on Best Workplaces for Commuters’ website. “Employers may continue to provide the bicycle benefit as a taxable benefit.”
NEXT: Are you or a spouse enrolled in school? This credit might apply to you.
7. You need an AGI at or below $118,000 for a Lifetime Learning Credit
The adjusted gross income (AGI) of married joint filers to qualify for a Lifetime Learning Credit (LLC) must be at or below $118,000. For 2019 filing, it was lower — $116,000. To be able to use the LLC, you, your spouse, or dependent must meet several specific qualifications, including: 1) You must pay your education expenses, 2) You must be enrolled at an eligible school (e.g., You cannot write off your pottery classes at the local crafts center, sorry) …
And 3) The eligible student must be yourself, your spouse, or dependent. It seems like requirement number three is basically number one, but that’s what the IRS website says!
NEXT: This is what you do with the money you earn abroad.
8. Foreign Earned Income Exclusion rises to $107,600
The Foreign Earned Income Exclusion for 2020 filings rises to $107,600. That’s up from 2019 — originally it was $105,900. If you’ve made money abroad, you might be able to have it excluded from being taxed. There are some requirements your income will have to meet, however, before getting that sweet exclusion.
If you were making money abroad as part of the U.S. government or got pay from specific combat zones, these cannot be included in the Foreign Earned Income Exclusion. See the IRS website for other rules on that.
NEXT: Pay attention to the changes to the Medical Savings Accounts! It’ll be different for 2020.
9. These are the requirements for a Medical Savings Account
For those that have self-only coverage in a Medical Savings Account (MSA), the plan must have a deductible NOT less than $2,350 (which is the same for the 2019 tax year), says the IRS press release. The deductible must not be more than $3,550 — that’s up $50 from tax year 2019. That 2019 criteria was also up $50 from the year prior — it’s all going up, up, and up!
For self-only coverage, the max out-of-pocket expense can be no more than $4,750. Got family coverage? Here’s what the IRS says about that: “The floor for the annual deductible is $4,750 … however, the deductible cannot be more than $7,100, up $100 from the limit for tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020.”
NEXT: What about the personal exemption for 2020? This news won’t floor you, but it’s good to know!
10. Personal exemption remains at $0
Unchanged, meaning that it remains at $0 — basically eliminated — thanks to the Tax Cuts and Jobs Act. It was eliminated for tax year 2018 and going forward temporarily until 2025, unless our government officials take it back. You could have filed this for your 2017 taxes. If you didn’t, oh well! No U-turns!
The personal exemption was a specific amount of money that you could claim for yourself and for each of your dependents. For the tax year 2017 (the last year you could claim it), the personal exemption was $4,050 per person, reads a tips document from the IRS.
NEXT: This temporary change affects estate-planning decisions.
11. Transfer mo’ money free of estate and gift taxes
Thanks to the The Tax Cuts and Jobs Act, millionaires and billionaires can leave more money to heirs when they die, writes Mercado in CNBC. An individual can transfer up to $11.58 million free of estate and gift taxes in 2020 — up from $11.4 million in 2019. Before this act took place, the exemption was $5.49 million per person.
It’s scheduled to go back to $5.6 million in 2026. The annual gift exclusion will continue to be $15,000 in 2020 — this is “the amount you can give to any other person without it counting against your lifetime exemption,” writes Mercado.
NEXT: Ever heard of the “Kiddie Tax”? Here’s the deal with that in the new tax year.
12. Here’s the criteria for the Kiddie Tax
If you have a child under the age of 18 and they have “unearned income,” they might qualify for the Kiddie Tax. “Unearned income” is income that comes from sources other than wages or salary, e.g., dividends and interest. So what might be made off of an estate or trust, for instance.
Other criteria that must be met are: 1) The child has unearned income over $2,200, 2) Meets other age requirements if they’re not 18 — i.e., they were 18 at the end of the tax year or were a full-time student at least age 19 and under 24, 3) At least one of their parents was alive at the end of the tax year, 4) The child was required to file a tax return, and 5) The child didn’t file a joint return.
NEXT: There was talk about getting rid of this credit but it’s still alive and well!
13. Qualified expenses for the adoption credit rise to $14,300
There was some talk of getting rid of the adoption credit, but it’s still in place! Don’t worry anymore, parents of adopted children. “The maximum credit allowed for adoptions for tax year 2020 is the amount of qualified adoption expenses up to $14,300, up from $14,080 for 2019,” reads the press release from the IRS.
The IRS says that qualified adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging away from home), and “other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.”
NEXT: This unpopular payment is still gone as we go into 2020— unless you’re in these states.
14. Five states reinstated the individual mandate
The individual mandate was the requirement implemented by the Affordable Care Act (ACA) to have a basic level of health care or pay a penalty. This was done away with for the tax year 2019 at the federal level, but the individual mandate was reinstated in five states — California, Massachusetts, New Jersey, Vermont, and Washington, D.C. — according to an entry on eHealth’s website.
If you live within those five states, it’s best to visit that state’s health care exchange website to see how much you owe. California is the most recent state to reinstate the individual mandate. Covered California’s website indicates this will drive premiums down to be 3.2% lower for 2020. We’ll see how it shakes out!
NEXT: More untaxed money into this account = more money toward medical expenses!
15. You can add up to $2,750 to your FSA now
So, most people won’t be able to leave millions for their heirs, but they might be able to participate in their work’s health Flexible Spending Account (FSA). “For the taxable years beginning in 2020, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019,” says the IRS press release.
Remember (as usual): The amounts contributed to FSA won’t be subject to federal taxes, Social Security tax, or Medicare tax. Sometimes the money used in an employee’s FSA can be for services your insurance doesn’t cover or can be used for copays. In any case, it might help to be able to add more to your FSA!
NEXT: You can put more money in this particular retirement account.
16. You can make higher 401(k) contributions
Limits on retirement plan contributions are set by the IRS each year. IRA limits will not be changing, but limits for 401(k) contributions are going up to $19,500 for workers under 50 and $26,000 for those 50 or older, writes Maurie Backman in The Motley Fool. That’s a $500 increase from 2019 for under-50-year-olds.
But it’s a whopping $1,000 increase for over-50-year-olds! The money that goes into your 401(k) is untaxed. Meaning, fewer taxes = mo’ money. That’s why it’s so important to open an account if your workplace offers one.
NEXT: If you’re making mo’ money, you might still be able to contribute to a Roth IRA.
17. Those with higher incomes can contribute to Roth IRAs
Now the limit for contributing to Roth IRAs is $139,000 for single filers, writes Backman in The Motley Fool. Filers may be barred completely from contributing at that income level, but at $124,000, their Roth IRA contributions will begin to phase out.
Married couples filing jointly will be barred completely from contributing to a Roth IRA if their combined income is more than $206,000. If a couple earns $196,000, their Roth IRA contributions will start to phase out.
NEXT: You can deduct this gift if you itemize.
18. Itemizing? Don’t forget to deduct gifts to charity
A taxpayer can reduce their tax burden by deducting any gifts to charity that they made during the tax year, says U.S. News & World Report. This is only something you can do if you’re itemizing for your taxes. For those nearing the standard deduction threshold, donating to charity can push taxpayers to allow itemization.
That’s according to what Stephen Henley, national tax practice leader at CBIZ MHM in Atlanta, Georgia, told U.S. News & World Report. In the same article, experts recommend that people give two years’ worth of charitable donations in one year (not sure many can afford that, but something to consider for high earners!).
19. Seniors have a new tax form, 1040-SR
Taxpayers 65 years and up now have a new tax form to take advantage of called 1040-SR, writes Dan Caplinger in a December 2019 report in The Motley Fool. It looks like the old 1040-A form with lines for various types of income, deductions, and credit.
Caplinger writes that, “With no limits on income, most people 65 and up should be able to use the form, simplifying their tax preparation and avoiding having to use the many forms and schedules associated with the regular 1040 that most people are required to file.”
NEXT: If your medical expenses are or exceed 10% of your income, you could use this deduction.
20. The threshold for deductible medical expenses rises from 7.5% to 10%
The Affordable Care Act from 2010 impacted taxes in various ways. One of these ways is it raised the threshold for medical expenses you can deduct from 7.5% to 10% of adjusted gross income, writes Karla Bowsher in an April 2019 report in Yahoo! Finance. This made it harder to qualify for this deduction, Bowsher says.
If you itemized medical expenses and they exceeded 10% of your income, then you could apply for the deduction. For years 2017 and 2018, it was 7.5%, and before that, it was 10%. So, we got a little break from 2017 to 2018 — better than nothing, right?
NEXT: This new law has impacted how some will file taxes.
21. The new SECURE Act includes some important tax changes
The current administration signed into law the very-long-named Setting Every Community Up for Retirement Enhancement — SECURE Act for short — on December 20, 2019, writes Bill Bischoff in MarketWatch. Some of the changes are as follows: 1) Penalty-free treatment for a qualified birth or adoption distribution.
2) Taxable amounts paid to graduate or postgraduate students can count as IRA contributions. 3) Borrowings cannot be distributed through credit cards without the distributed amounts being taxed. 4) A child’s unearned income (Kiddie Tax) can be taxed at the same rate paid by trusts and estates.
NEXT: Here’s what’ll happen if you don’t pay your taxes on time.
22. You’ll pay a bigger penalty for not filing taxes
Here’s another impact from the SECURE Act: If a taxpayer fails to file their federal taxes, then they’ll have to pay a penalty to the federal government. Your penalty will be the lesser of either 1) $400 or 2) 100% of taxes due. These penalties apply to taxes due 2020 and beyond — including extensions.
Taxes are due Wednesday, April 15, 2020. To avoid penalties, start your taxes early. As soon as you get your W-2, you can start preparing your taxes to file — or giving them to an accountant that will be preparing your taxes. If needed, you can request an extension.
NEXT: The required minimum retirement distribution age has gone up.
23. The required minimum retirement distribution age is now 72
“The times they are a-changin’,” Bob Dylan once sang — last year, the required minimum distribution age was 70.5 years of age. (Why the 0.5? We don’t know, tbh.) In 2020, the minimum retirement distribution age is 72 years of age, reads a January 2020 Fox 5 news report by Dana Fowle.
That means more time for the money to grow and grow and grow! “But this the downer: If you are to inherit a retirement plan, you must withdraw the money in 10 years,” writes Fowle. “There are rare exceptions, but this is basically the new rule.”
NEXT: This is important information for divorcés.
24. You cannot deduct alimony payments as of 2018
If you got divorced in December 2018, you can still be grandfathered into the old law. These must be payments that met the tax-law definition of alimony. Divorces in January 2019 onward will mean you can’t use alimony payments as a tax write-off, says U.S. News & World Report. This applies to both new and modified divorces.
Before, recipients of alimony had to report this as taxable income. MarketWatch says that this might get expensive for those that have to pay alimony. The write-off saved a substantial amount of money for alimony payers.
NEXT: Here’s how the gig economy has complicated taxes.
24. The gig economy makes taxes complicated in 2020
Taxpayers in 2020 are likely to have participated in the gig economy. With the job market becoming automated and changes to industries happening, individuals need more than one income stream to support themselves. That means that there might be lots of 1099s in addition to W-2s here and there. (Super fun for accountants! *Sarcasm*)
“Expect to see less-organized taxpayers fail to report all of their income in 2020,” reads an entry on Accounting Today. “Some of this will go undetected, while others will get slapped with penalties.” If you didn’t see our slide about penalties — go back and check it out.
NEXT: Here’s another complication caused by the gig economy.
25. Remember those quarterly estimated taxes!
The gig economy might hit a snag in California, at least with the passage of AB-5 (it basically limits the work some industries of freelancers can partake in), so we’re likely to see fewer California freelancers in 2020. However, 2019 probably still had a healthy amount in California and elsewhere in the U.S.
The same entry on Accounting Today reminds companies to file those quarterly estimated taxes. “Taxpayers will be required to pay quarterly estimated taxes for the 2019 tax year,” it says. “Some people are not aware they have to do this, or don’t know how and when to make their payments.”
NEXT: It’s much better to overpay than underpay.
26. A common 2020 tax issue: Underpaying estimated tax payments
So, taxpayers might remember that they have to put payments down on those quarterly estimated taxes. However, they might underestimate what they actually owe on these payments. “It’s OK if they slightly underpay, but it’s much better if they slightly overpay,” reads the Accounting Today entry.
“This ensures they end up getting a small amount of money back in April (as opposed to forking over even more money).” Remember, hiring a professional (if it’s within your means) is an option if tax filing gets a little bit too complicated!
NEXT: These are common tax filing errors that might happen no matter what year it is.
27. Social Security numbers written incorrectly is a common tax error
Not only are these written wrong (shouldn’t you have your Social Security number memorized by now?), but so are bank account numbers (for instance, erroneous routing numbers, indicates Accounting Today), and there is often a lack of correct signatures and missing information. Errors on tax forms cause delays in processing and returns.
It also might cause returns to get flagged by auditors, reads the entry on Accounting Today I’ve been citing for the past few slides. It’s all too common for taxpayers (or even accountants!) to make errors on their tax forms. Moral of the story: Double-check your taxes before you file.
NEXT: Remember the IRS’ new method for inflation adjustments.
28. The IRS has a new method for inflation adjustments
Congress’ Joint Committee on Taxation said this new method will cost taxpayers $133.5 billion over a decade, reported MarketWatch. The Tax Cuts and Jobs Act required the IRS to switch over to a new method for adjustment-making. The law did lower tax rates and ease tax burdens for households, MarketWatch says.
Standard deduction and tax brackets will continue to climb but will do so more slowly because of the IRS’ new method for inflation adjustment. The method is basically a new calculation that the IRS will be using over the old version.
NEXT: Review this carefully!
29. Review federal withholding payments
Tim Steffan, director of advanced planning for Baird in Milwaukee, told U.S. News & World Report that taxpayers need to review federal withholding payments to avoid underpayment penalties. This seems to be a common problem for taxpayers — either that or they overpay by accident! Sometimes these mistakes are caught by the IRS, but better safe than sorry.
Reviewing federal withholding payments is important. If you’re having issues with figuring this out, the IRS has tables and a withholding calculator you can reference. (If you haven’t poked around the IRS website, please do! There are multiple tables that can help.)
NEXT: You can’t deduct your student loans but you can deduct something else associated with student loans …
30. The student loan interest deduction allows a deduction of up to $2,500
Got student loans? You and the rest of the U.S., apparently! Student loan debt is over $14.6 trillion, says the New York Federal Reserve. You can’t deduct student loans from your taxes, but you can deduct the interest that your loans accumulate.
“The student loan interest deduction lets you deduct up to $2,500 of the loan interest you paid during the year,” writes Derek Silva in a November 22, 2019, report in Policygenius. “This is an above-the-line deduction, so it decreases how much of your income is actually subject to tax.”