It is time for you to get your pencils out and grab the calculator. That’s because the IRS recently released the new breakdown of what filing the 2019 taxes in 2020 will mean. If you want to ensure a smooth filing process for the Tax Return 2019, note down these changes:
1. Standard Deductions and Income Tax Brackets
One of the seven broad sweeping changes includes that in the standard deduction. It is higher for 2020 filings for 2019 tax year, so singles will be seeing $12,400 while the amount is $24,800 for married joint filers. Besides that, the overhaul for the 2019 Tax Return also contains a lower individual income tax rate and an elimination of personal exemptions. The tweaks from the IRS to the individual income tax brackets are obviously a result of aligning them with inflation.
Learn about bunching, a new way to get more than standard deduction.
The folks at IRS have shared the corresponding income brackets and the tax rates for 2019. We present the figures below for filing singles:
- Earnings higher than $510,300 have a 37% tax rate
- Earnings higher than $204,100 but less than $510,300 have a 35% tax rate
- Earnings higher than $160,725 but less than $204,100 have a 32% tax rate
- Earnings higher than $84,200 but less than $160,725 have a 24% tax rate
- Earnings higher than: $39,475 but less than $84,200 have a 22% tax rate
- Earnings higher than $9,700 but less than $39,475 have a 12% tax rate
- Earnings less than or $9,700 have a 10% tax rate
Couples filing together or individually may have to pay between 10% to 37%. The first bracket for the former begins at $19,400, while it is $9,700 for the latter.
Compare 2020 Tax brackets vs 2019 Tax Brackets to do tax planning
2. Alimony Deduction
Another change that is now in effect is the elimination of the alimony deduction. According to it, such payments common during divorce and separation agreements will not be considered deductible. Thus, a spouse paying alimony this year will not be able to write it off. Likewise, the recipient of that alimony cannot count it as income. Thus, a divorce may not be as financially-smart a decision in the coming years as it used to be!
3. Health Savings Account Limit
Those citizens who qualify for a Health Savings Account will be seeing an even higher standard deduction rate. For the families, the numbers jumped from $7,000 to $7,100. The individual limit was increased too and is now $3,550.
We’d suggest that when filling out the IRS Form in 2020, you keep in mind that you can rollover the balances to the next year. This allows an accruement of interest, which is tax-free.
4. Individual Mandate Penalty
Like the alimony elimination, this is another change in the tax code that should have been in effect in 2018. However, when filing a Tax Return 2019, the individual won’t have to pay the mandate penalty. This amount was due to folks without health insurance coverage. But since they did not qualify for an exemption, they didn’t have many options left to them. That will change when they file this year, and they won’t have to pay the penalty.
5. Higher Medical Expense Deduction Threshold
The Affordable Care Act had a higher threshold for deductible medical and dental expenses, i.e., 7.5%-10% of the adjusted gross income. It made qualifying for the deduction harder for taxpayers. For instance, itemizing the tax deductions meant that they could deduct eligible out-of-pocket medical expenses only if they were higher than 10% of your income — and not 7.5%.
Paid under the table? Learn how you too can easily be tax compliant
Due to the Tax Cuts and Jobs Act, now taxpayers will see the threshold lowered to 7.5%. However, this will only be viable for the previous two tax years, i.e., 2017 and 2018. For 2019, the bar will return to 10%. Therefore, this year, itemizing medical and dental expenses may not be as fruitful for taxpayers as it was before. Only if the cost exceeds 10% will they be able to write it off as deductibles!
6. Retirement Plan Contributions
For US citizens who also contribute to a retirement plan, there’s good news! The IRS is going to increase the limit for employee contribution for most 457 plans, 401(k), and 403(b). The new figure is $19,000 – a $500 bump. Talk to a tax expert if you’re over 50. That’s because you may be eligible for the additional contributed amount of $6,000. IRA had previously increased its own contributions a while ago, i.e., in 2013. This will happen again for the 2019 Tax Return, making it $6,000. However, for the quinquagenarians and those older, the catch-up contribution amount remains at $1,000.
If you’d like to learn more about tax laws and your business, we at Akif CPA are here to help. Learn about our services here.
Do you have unique issues or concerns not discussed in this blog then please contact us by email or phone. We are here to help.
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