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2020 Tax Planning

Year End Preparations

How to Prepare for the 2020 Tax Season

The countdown begins. Once the clock 
rolls us into 2020, tax season gets underway. The old calendar year, 2019, will have officially been put to rest.

Deductions from your paychecks and other income sources will begin counting for the New Year.

Once it’s 2020, we can celebrate and look to even better days ahead. But we dare not neglect our fiduciary obligations to the old year.

In this guide, we’ll explore ways you could be affected by the 2019 changes to the tax law. Keep in mind, this guide is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your strategy.

On January 1, it’ll be 104 days until April 15, 2020. That’s the deadline the Internal Revenue Service sets for tax returns. If you miss that deadline, you will face consequences.

What’s on the horizon? 2020 will be a year of evaluation as the United States holds its presidential election.

Will tax issues play a key role in the national conversation? It’s very possible.

President Donald Trump and White House economic advisor Larry Kudlow have announced what are being called “middle-income” tax credits for 2020. Also being called “Tax Cuts 2.0,” Trump is seeking to make elements of the 2017 Tax Cuts and Job Act permanent. Without legislation, the cuts are set to sunset in 2025.1,2

While that represents a potential future for the 2017 Tax Cuts and Jobs Act, there are still elements of that bill that are coming to pass and several that will roll out as you are preparing to file for your 2019 taxes. 

One of the big changes coming to pass this year involves changes that the 2017 Tax Cuts and Jobs Act made to the Affordable Care Act. The individual mandate, sometimes referred to as the shared responsibility payment, has been repealed. For those who were required to have health insurance under the Affordable Care Act, yet weren’t insured, a tax penalty applied. For Tax Year 2019, that no longer applies.3

Another change related to the Affordable Care Act is the threshold for when taxpayers can take a deduction for expenses related to medical or dental bills. The 2017 Tax Cuts and Jobs Act had reduced that threshold from 10% down to its previous 7.5%. For 2019, the threshold returns to 10%.3

Married couples who divorced in 2019 will face a much different set of rules when it comes to alimony. Where alimony payments were once tax deductible, that is no longer the case going forward. Likewise, alimony for the recipient spouse won’t count as taxable income.3

In addition, there are larger limits for workplace retirement plan contributions (now $19,000, with an additional $6,000 for those 50 and older) and Health Savings Accounts ($3,500 for self, $7,000 for family).3

If you spend your Health Savings Account funds on nonmedical expenses before age 65, you may be

required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.


The Tax Brackets

The tax brackets are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.4

 

    Here are the tax brackets and the corresponding income ranges:4

 

2019 tax rate

Single

Married filing jointly

10%

$0 to $9,700

$0 to $19,400

12%

$9701 to $39,475

$19,401 to $78,950

22%

$39,476 to $84,200

$78,951 to $168,400

24%

$84,201 to $160,725

$168,401 to $321,450

32%

$160,726 to $204,000

$321,451 to $408,200

35%

$204,001 to $510,300

$408,201 to $612,350

37%

$510,301+

$612,351+

 

The raising of income requirements for the tax brackets also means wage earners may fall into lower brackets. Here’s one example. A single filer at $83,000 in taxable income would fall into the 24% bracket for tax year 2018. The filer would be in the 22% tax bracket in 2019.4,5

Another single filer with an income of more than $500,000 (but less than $510,300) would have been in the 37% bracket in 2018. For 2019, they are in the 35% bracket. Meanwhile, a single filer earning between $160,000 and $160,725 in 2018 would have been well within the 32% bracket. In tax year 2019, they are in the 24% bracket.4,5

 These new rates are scheduled to expire in 2025 unless Congress acts to make them permanent. Exemptions also changed under the new tax code.

 

Here is an overview of the standard deductions

    since 2016:4,6

Tax Year

2019

2018

2017

Single

$12,200

$12,000

$6,350

Married filing jointly

$24,400

$24,000

$12,700

Married filing separately

$12,200

$12,000

$6,350

Head of household

$18,350

$18,000

$9,350

Personal exemption

Repealed

Repealed

$4,050


The higher standard deductions may make it more attractive (compared to itemizing) for many taxpayers. Taxpayers who had itemized, to take advantage of deductions for high mortgage interest, large charity donations, or local taxes, may be unable to reach the standard deduction’s higher limit.

Under previous tax law, taxpayers could claim exemptions for themselves, spouses, and dependents. This was changed in the 2017 Tax Cuts and Jobs Act.7

The act eliminated all personal and dependent exemptions. The higher deduction is intended to fill that exemption gap.


How to Prepare

While the first filing after the 2017 Tax Cuts and Jobs Act came into effect was very different, the process has not changed much from year to year. The filing and other deadlines haven’t changed, for instance. You should begin preparing early to avoid any unforeseen challenges.8

Get a checkup: As a starter, the IRS urges taxpayers to conduct paycheck checkups.9
The agency provides tools and resources to help you calculate the correct amount to have withdrawn from your paycheck.

The calculator will help you determine if your employer is withholding adequate amounts from your paycheck.

The calculator asks for your projected gross income, your current withholding number, the current amount of federal taxes withheld, and other paycheck-related questions.

The calculator leads you through various screens that require you to enter requested numbers into boxes. The calculator looks similar to a tax-filing form.

The final figure: Once the calculator generates the estimated taxes, you’ll either owe or be refunded, it offers suggestions on how to change your withholding amount or request to get additional money withheld from
your check.

For the tax year 2018, the average IRS refund usually exceeds $2,800.

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