Changes to 2020 Taxes You Should Know About

With each new year tends to come updates to the U.S. tax code, with some years having more significant tax changes than others. Fortunately, for simplicity’s sake, the major changes from the Tax Cut and Jobs Act of 2017 are already in effect, and tax changes in 2020 appear to be relatively small.

Still, there are a few updates to keep in mind, both when filing taxes by April 15, 2020, for tax year 2019, as well as throughout tax year 2020 that will affect tax returns filed in 2021.

Updates to Tax Brackets

Income limits for tax brackets tend to be adjusted each year due to inflation. For taxpayers, especially those whose incomes have not kept pace with inflation, tax bills could end up being a bit lower as a result.

Specifically, the personal income tax rates for tax years 2019 and 2020 are set as follows:

Source: "2019 Tax Brackets," "2020 Tax Brackets."

Updates to Deductions

Similar to inflationary increases to tax brackets, many tax deduction caps also receive a slight increase as the years progress. In particular, the standard deduction for married couples filing jointly jumps from $24,400 in tax year 2019 to $24,800 for tax year 2020. For single filers, the standard deduction rises from $12,200 in tax year 2019 to $12,400 for tax year 2020.

Other types of deductions have also received slight increases, such as the monthly qualified transportation or parking benefit, which rises from $265 in tax year 2019 to $270 in tax year 2020. While that equals only a $60 annual change to the tax deduction, you may still want to adjust your paycheck withholding accordingly in 2020 so you can get the full benefit.

However, not all deductions increase each year. For example, for tax year 2019, affecting your 2020 tax preparation, those who make alimony payments cannot deduct this expense if the payment agreement was made after December 31, 2018. The receiving spouse also cannot claim alimony as income in these cases.

Changes Affecting Retirement Accounts

For both tax years 2019 and 2020, the annual limit for individual retirement account (IRA) contributions is $6,000, or $7,000 for those age 50 or older, up $500 from 2018. If you’ve yet to make a full contribution for tax year 2019, you can do so up until the filing deadline of April 15, 2020.

Similarly, those who have a 401(k), 403(b), most 457 plans, or the federal government's Thrift Savings Plan can benefit from the $500 increase in the contribution cap for tax year 2019 to $19,000. For tax year 2020, that rises to $19,500. Those age 50 or older can also take advantage of the $6,000 limit for catch-up contributions in tax year 2019, which increases to $6,500 in tax year 2020.

The SECURE Act and RMDs

The newly passed Setting Every Community Up for Retirement Enhancement (SECURE) Act will also affect some retirement plans and associated tax planning. For example, the new law increases the age to begin taking required minimum distributions (RMDs) from 70 ½ to 72. The law also removes the age cap on contributing to IRAs for those who are still working.

It’s important to be aware of tax law changes so that you can optimize your income and avoid a tax hit. If you have questions how the rules apply to you, then consider talking with a financial advisor who can help assess how your taxes tie into your overall financial situation. Our fee-only financial advisory firm in Roseville, CA, provides tax planning and preparation as part of our wealth management services.

Schedule a complimentary, 15-minute call with a fee-only financial advisor today to discuss your personal situation.