Important Changes For The 2020 Tax Season
It’s that time of year: tax season. Many people dread tax season, the annual period when Americans are required to file their tax returns. Although filing your taxes is a process that’s relatively the same each year, there are some important changes taking place in 2020. And it’s critical that you know about these changes before you begin working on your tax return. With the tax-filing deadline extended to July 15, you now have more time to perfect your taxes and learn about this year’s changes.
For 2020, certain tax changes may affect your deductions, your refund, and how you report your financial information. That’s why it’s so important to know what’s different. If any of these changes apply to you, you’ll want to read up on them thoroughly to prevent costly mistakes on your tax return.
If you’re wondering what’s changed for your tax return, here are three important updates you need to know.
New Income Brackets And Marginal Tax Rates
One of the most important changes made for the 2020 tax season is the creation of different tax brackets and tax rates. Your tax bracket determines how much you owe the IRS in taxes – and that number could increase or decrease depending on your income level.
This year, you might find yourself paying less in taxes if your bracket has changed. Or, you might wind up owing a bit more if you’ve been bumped into a higher bracket.
The highest tax rate is for individual single taxpayers with annual income greater than $518,400 ($622,050 for married couples filing taxes jointly) – you’ll pay 37 percent. On the opposite end of the spectrum, the lowest tax rate is 10 percent for single individuals with less than $9,875 in annual income ($19,750 for couples filing jointly).
As for the other brackets, here are the latest tax rates:
- 35 percent for incomes over $207,350 ($414,700 for married couples filing jointly);
- 32 percent for incomes over $163,300 ($326,600 for married couples filing jointly);
- 24 percent for incomes over $85,525 ($171,050 for married couples filing jointly);
- 22 percent for incomes over $40,125 ($80,250 for married couples filing jointly);
- 12 percent for incomes over $9,875 ($19,750 for married couples filing jointly).
Although your tax bracket might have changed, it’s also important to know that there is no limit on itemized deductions. It’s also important to remember that the margin rates don’t always apply to a person’s total annual income. A progressive rate can apply, which means your income may be spread across multiple tax brackets until reaching the required tax rate.
For example, here is a look at how an individual with a $600,000 income in 2019 could pay their taxes:
- 10 percent on the first $9,875 of taxable income.
- 12 percent on taxable income beyond $9,875 but below $40,125.
- 22 percent on taxable income beyond $40,125 but below $85,525.
It can be a bit confusing, but talking to an accountant or tax professional can be helpful. Someone who’s well-versed in current tax law will be able to effortlessly prepare your taxes and let you know how progressive rates might apply.
Changes To Standard Deductions And Estate or Gift Taxes
For 2020, the IRS has also changed how deductions and estate gift taxes work.
The IRS increased the standard individual personal income tax deduction to $12,400. For married couples, this means you can receive an automatic deduction of $24,800 if you file jointly. If you’d prefer, you can still itemize your deductions if you believe your deductions would be higher than taking the automatic credit.
The federal estate and gift tax rate is steady at 40 percent this year, but the threshold has increased. To avoid the penalty, individuals can keep the transferred value at or below $11.4 million to avoid this type of penalty. The limit slightly increased to $11.58 million.
When handling complex calculations like deductions and estate or gift taxes, you might want to consider speaking with a tax professional. These experts can help you decide what the best option is for your finances, and they can help you avoid costly mistakes on your tax return.
Retirement Savings Plans And Healthcare Savings Account
Another important IRS change to take note of affects deductions for healthcare-related spending and certain types of retirement savings plans. It gives Americans the chance to save more money without being taxed on those savings.
The amount of money employees are allowed to contribute to their 401(k), 403(b) and other plans has increased by $500 to $19,500. Those over the age of 50 with individual retirement accounts have an increased contribution limit of $7,000.
Have a health savings account (HSA)? There are changes for HSAs, and they apply to those who bought select high-deductible healthcare coverage plans during the 2019 open enrollment period. You’re now allowed to make up to $3,500 in contributions per year with an individual plan, or up to $7,100 for a family plan.
If you have a flexible spending account (FSAs), the maximum contribution has also increased. You can now add an additional $50, bringing the maximum contribution allowed to $2,7450. You’re also now allowed to roll over the balance from year to year.
Find An Expert To Help With Your Taxes
Tax law is long-standing and rarely overhauled. However, when changes do happen, it’s important for Americans to understand what’s going on. Even a small change to something like tax brackets can significantly affect how you handle your annual tax return. And it can also affect your owed taxes and potential refund. Make sure you’re aware of and up-to-date on the latest tax changes so you’re able to complete your taxes as accurately as possible. Remember, even a small mistake could delay your refund.
If the changes are a bit confusing, consider getting professional help with your tax return. You can search for and meet with a tax prep professional in your area, who will be able to go through your financial information and properly fill out your return. Or, you can use tax prep services and software online. These services can guide you through the step-by-step process of filling out your tax return – and many even promise to guarantee an error-free return. These options can make filing your taxes much simpler, regardless of any annual changes.