The 2019 tax year, which your return is due by April 2020, is quickly approaching its end and if you want to make the most of everything from tax deduction to retirement accounts this year, now is the time to learn about the rules that will take effect by your next federal income tax return.
Many key dollar figures, from standard deductions to retirement account contribution limits, can change every year due to inflation. Additionally, some aspects of the federal tax reform law of 2017 failed to take effect until this year. With this thought in mind, we take a dive into some of the biggest ways in which the federal tax return you will file by April 2020 will differ from the last one you filed.
No Individual Mandate Penalty
The majority of the tax code changes that stemmed from the Tax Cuts and Jobs Act of 2017 took effect in 2018. One exception is the change regarding shared responsibility payment, which will take effect this upcoming year. The shared responsibility payment (also known as individual mandate penalty) has applied to individuals who are required to have health insurance under the Affordable Care Act, but who did not get coverage and did not qualify for an exemption. Starting with this upcoming tax year, however, there will be no penalty. The Tax Cuts and Jobs Act mandated to cut it out by 2019. Those who do not have health insurance this year will not owe the penalty when filing taxes during 2020.
Higher Medical Expense Deduction Threshold
Another way in which the Affordable Care Act impacted taxes was by increasing the threshold for deductible medical and dental expenses from 7.5% to 10% of adjusted gross income. This made it harder to qualify for the deduction. If you itemized your tax deductions, you could deduct eligible-out-of-pocket medical expenses if they exceeded 10% of your income, rather than the previous 7.5%. The Tax Cuts and Jobs Act provided taxpayers with a brief reprieve from that change, going back to 7.5%. Starting this upcoming year, it returns to 10%.
No Alimony Deduction
Elimination of the alimony deduction is another Tax Cuts and Jobs Act change that took effect in tax year 2019 as opposed to 2018. For divorce and separation agreement made or modified this year or thereafter, alimony payments will not be deductible, according to the IRS Publication 5307. Therefore, a spouse who gets divorced this year and pays alimony this year cannot write the payment off on a tax return in 2020. That also indicates that a spouse who gets divorced this year and receives alimony this year cannot count the payments as income.
Higher Retirement Account Contribution Limits
Starting in the year 2020, you can stash more cash in various types of retirement accounts. Contributions made in 2019 to such accounts, including traditional 401k plans and traditional individual retirement accounts, could be deducted on your next tax return. The increases to IRA contribution limits for 2019 are a rather big deal, as this is the first year since 2013 that the IRA limits have budged. Some contribution limits will also increase for the tax year of 2020.
Higher HSA Contribution Limits
Health saving accounts are another category of tax-advantaged accounts for which the contribution limits generally increase as the new year rolls in. HSAs are not strictly reserved for retirement savings, but they can still be applied to retirement accounts, nonetheless. The 2019 contribution limits for people who are eligible for an HSA and have the following types of high-deductible health insurance policies consist of the following:
- Self-only coverage: $3,500
- Family coverage: $7,000
Higher Standard Deductions
Standard deductions are somewhat higher this year on behalf of inflation. The standard deduction reduced the amount of your income that’s subject to federal taxes. In the case that a married couple files a joint tax return and is eligible and chooses to take the standard deduction on their next return, they would not be taxed on the first $24,400 on their taxable income from 2019.
Higher Income Brackets
In addition to standard deductions, income tax brackets are also somewhat higher in 2019 than they were last year. This is also due to inflation. The IRS reports that the tax rates and corresponding income brackets for 2019 are as follows for folks whose tax filing status is single:
- 37% tax rate: Applies to incomes of more than $510,300
- 35%: More than $204,100 but not more than $510,300
- 32%: More than $160,725 but not more than $204,100
- 24%: More than $84,200 but not more than $160,725
- 22%: More than $39,475 but not more than $84,200
- 12%: More than $9,700 but not more than $39,475
- 10%: $9,700 or less
Choose The Herrera Group to Help You Prepare for the Upcoming Tax Season
The Herrera Group strives to help our clients make the most out of their savings and earnings over the years. Contact us today to learn more about how we can keep your accounts and investments covered.