By Ralph Carnicer at Financial Planning on August 13, 2019
We’re roughly halfway through 2019, which means the 2020 tax season will soon be upon us. But rather than wait until next March or April to think about their tax returns, taxpayers — and their advisors — should proactively consider some of the challenges that they could face.
While it’s been more than a year since the Tax Cuts and Jobs Act went into full effect, many Americans are still relatively uncertain of how these changes impact them. The 2020 tax season could be the season that we see old problems resurface and a set of new issues emerge.
Here are some of the common tax problems of 2020 that we should all be aware of.
1. The individual mandate penalty
Almost all of the Tax Code changes stemming from the Tax Cuts and Jobs Act went into effect during 2018. However, a few didn’t become active until this year. The change to the shared responsibility payment is one of these.
The shared responsibility payment, which is commonly referred to as the individual mandate penalty, was previously introduced under the Affordable Care Act. It essentially required people to have some form of health insurance (Obamacare, private or otherwise). If a taxpayer couldn’t prove they had health insurance, they owed a penalty with their taxes.
Starting with the 2020 tax season (fiscal year 2019), there’s no longer a federal penalty. However — and this is where the confusion exists — there are still some state-based penalties. For example, New Jersey, Massachusetts and Washington, D.C., all still have some form of penalty in place. Taxpayers will need to be cautious in this regard and do their research.
2. Changes to retirement contribution limits
Starting with this year, taxpayers are able to stash away more money in tax-advantaged retirement accounts, which could allow individuals to lower their tax burden. Here’s a breakdown of the changes:
- The 401(k) base contribution is up to $19,000 (it was $18,500 in 2018);
- The 401(k) catch-up contribution remains unchanged at $6,000;
- The IRA base contribution (whether Roth or traditional) is up to $6,000 (it was $5,500 in 2018); and,
- The IRA catch-up contribution remains unchanged at $1,000.
While these may not seem like major increases, they’re important. The $500 increase in IRA contribution limits is especially noteworthy, as these limits hadn’t budged since 2013.
3. Changes to HSA contribution limits
In addition to increasing the amount of money taxpayers can contribute to qualifying retirement plans, health savings accounts are also getting a tiny boost this year. For those with high-deductible policies that qualify under HSA guidelines, the changes are as follows:
- Self-only coverage: now $3,500 (up from $3,450 in 2018); and,
- Family coverage: now $7,000 (up from $6,900 in 2018).
Again, these slight adjustments won’t make anyone rich, but they are worth noting and could cause some confusion come April 2020.
4. The medical expense deduction threshold
There’s been a lot of back and forth regarding the threshold for deductible medical and dental expenses over the past decade. In 2010, the Affordable Care Act raised the number from 7.5 percent to 10 percent of adjusted gross income. This made it a lot more difficult for people to qualify.
Then came the Tax Cuts and Jobs Act, which brought the threshold back down to 7.5 percent in 2017 and 2018. Unfortunately, it’s returning to 10 percent this year.
What does all of this mean? Basically, if a taxpayer plans on itemizing in 2019, their unreimbursed medical and dental expenses need to exceed 10 percent of their adjusted gross income in order to qualify as a deduction.