How Will Your Taxes Change in 2020?
It’s a new year, which means new tax changes.
It won’t be long before tax season starts up to finalize annual tax returns. 2019 was a big year for tax changes, and while not as drastic, there will be changes you’ll want to be aware of for 2020.
Here are some of the ways your federal tax return in 2020 will differ from that of 2019.
1. Higher HSA Contribution Limits
“A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.”
You’re only permitted to contribute to an HSA if you have a qualifying High Deductible Health Plan (HDHP). For 2019, you were permitted to contribute up to $3,500 for individual coverage and $7,000 for family coverage.
For 2020, anyone with an HDHP can contribute up to $3,550 for individual coverage and $7,100 for family coverage.
2. No Alimony Deduction
When the Tax Cuts and Jobs Act took effect it eliminated the alimony deduction.
This change took effect in 2019, not 2018, so if you paid alimony to an ex-spouse this year, you’re not permitted to write off the payments on your tax return in 2020.
For those who receive alimony, they will not count payments as income on their tax return filed in 2020.
3. Changes to Form W-4
The new design reduces the form's complexity and increases the transparency and accuracy of the withholding system. While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.
Furthermore, you’ll realize that allowances are no longer used on Form W-4. In past years, before recent tax law changes, the value of a withholding allowance was tied to the amount of the personal exemption. Now that this has changed, it’s no longer necessary to include this on the form. It’s important to note that new employees will have to use this form moving forward. Current employees will not need to use the new form unless they are going to change their withholding.
4. Higher Retirement Contribution Limits
For 401(k) accounts, the IRS raised the contribution limits for employees to $19,500 (from $19,000 in 2019). Also, if you’re 50 or older, you can make $6,500 in additional catch-up contributions, which is a $500 increase over last year.
Note: for traditional and Roth IRAs, your total contributions cannot exceed $6,000, plus an additional $1,000 catch-up contribution for those individuals 50 or older, which is the same as 2019.
While it may feel that you have plenty of time to prepare your 2019 tax return, the earlier you start planning and knowing what to expect, the easier your tax preparation will be. Be sure to make note of the changes mentioned above, and keep an eye out for any others that could affect your small business.