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Important Things to Know About 2020 Tax Season

Published January 16, 2020

5 minute read

By Jim Greene

Tax season starts to loom shortly after the calendar turns to the new year, and the Internal Revenue Service (IRS) has introduced a number of new regulations and policies for 2020. The good news is that this year is shaping up to be far less complicated then 2019, when major tax reforms went into effect and significantly changed tax rates and eligible deductions. Many people ended up enjoying tax relief thanks to the new regulations, but for most, navigating the changes was far from easy.

This year, there are fewer policy changes. Tax season officially opens on January 27, 2020. You are required to file your taxes no later than April 15, 2020. Here’s a primer on what’s new and what’s changed.

Tax Rates and Income Brackets

The IRS published its inflation-related income adjustments and marginal tax rates on November 6, 2019. Here’s a rundown of the marginal tax rates that will apply when you file your tax return in 2020:

The 2018 tax reforms eliminated the previously existing limits on itemized deductions. This change remains in place for 2020.

As always, remember that the aforementioned marginal rates do not necessarily apply to every dollar of a person’s income. In other words, a high individual earner in the 37% bracket does not have to pay a 37% tax on his or her total annual income. Instead, sliding rates apply at each level. For example, consider an individual who made $600,000 in 2019. He or she would pay:

It’s not as complicated as it sounds, but don’t hesitate to consult a tax professional if you need help or advice.

There’s also some good news. If you made less than $69,000 in 2019, you’re entitled to use free online software from the IRS and its partner organizations to create and file your return.

Changes to Standard Deductions and Estate/Gift Taxes

The IRS boosted its standard individual personal income tax deduction to $12,400 for the 2020 filing cycle. This means that married couples filing joint returns are entitled to an automatic deduction of $24,800.

For 2020, the federal estate and gift tax rate remains at 40%, but the value threshold increased. In 2019, individuals could avoid this hefty penalty by keeping the transferred value at or below $11.4 million. This year, the limit has nudged up to $11.58 million.

Retirement Savings Plans and Healthcare Savings Accounts

The IRS has also introduced some changes to their tax policies regarding deductions for healthcare-related spending and contributions to certain types of retirement savings plans. These updates affect millions of Americans, so they’re definitely worth knowing about. They could save you a decent chunk of change.

If you have a 401(k), 403(b), or 457 retirement savings plan, you are now allowed to squirrel away up to $19,500 of your own money (not counting employer contributions). This represents a $500 increase from 2019. Those aged 50 and up are also entitled to contribute an additional $6,500 to such accounts, which is another $500 bump from last year.

Health savings accounts are specialized financial vehicles available to consumers who purchased certain types of high-deductible healthcare coverage plans over the course of the open enrollment window. If you’ve got one, you’re now allowed to contribute up to $3,550 per year if you hold a self-only plan and up to $7,100 if you have a family plan. These savings accounts are designed to help you cover the costs associated with high deductibles in the event that you must file a claim.

Healthcare flexible spending accounts (FSAs) are similar, but they allow you to carry the balance across fiscal years. The maximum contribution to these FSAs also rose $50 for the 2020 tax year, to a limit of $2,750.

Do You Pay or Receive Alimony?

If you’re a divorcee and your split from your spouse legally went into effect on or after January 1, 2019, some changes apply to you. Those making alimony payments will no longer be permitted to deduct the amounts from their personal income tax obligations. Similarly, those receiving alimony payments will no longer be subject to income tax on the funds they receive.

New Tax Forms and Revisions to Existing Tax Forms

The IRS has created a number of new forms for the 2020 tax season. They include:

There is also a new version of Form 1040 (Individual Income Tax Return), which has been revised to include three schedules instead of six.

Summing It Up

Most taxpayers should find it easier to prepare and file their returns in 2020 after adjusting to the major changes introduced during the 2019 tax cycle. The inflation-related limit increases are specifically intended to reflect annual rises in the costs of goods and services. It literally pays to stay abreast of them. Don’t assume everything will be the same from year to year, as that can cost you.

Filing your personal income tax can be a complicated undertaking, especially if you’re not sure what deductions you qualify for or how to claim them. In this regard, a seasoned tax professional can be a valuable asset. In many cases, the cost of hiring one pays for itself in the form of a bigger tax return and/or more tax deductions. Be sure to reach out if you need some advice or assistance.

April 15th Circled on Calendar with Tax Forms

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Jim Greene

Contributor

Jim Greene is a freelance writer based in the Toronto, Canada area. He has been writing professionally since 2001 and has an extensive professional background in consumer research, personal finance and economics.

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