It is a new year, meaning new tax changes.
It won’t be long before the start of the tax season to finalize yearly tax returns. 2019 has been a big year for tax changes and, although not as dramatic, there will be changes that you will want to be aware of by 2020.
Here are some of the ways the 2020 federal tax return will be different from 2019.
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HSA Contribution Limits
Health savings accounts (HSA) are a kind of tax-advantaged account that helps many people save money for spending on health care. HealthCare.gov lays down an HSA as:
“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 are allowed to contribute to an HSA only if you have a High Deductible Health Plan (HDHP) that applies. You were allowed to contribute up to $3,500 for individual coverage for 2019, and $7,000 for family coverage.
Whoever has an HDHP will contribute up to $3,550 for individual coverage and $7,100 for family coverage by 2020.
2. Alimony Deduction
When the Tax Cuts and Jobs Act came into effect the alimony deduction was eliminated.
The amendment came into effect in 2019, not 2018, so if you paid alimony this year to an ex-spouse, you are not allowed to write off the payments on your tax return until 2020.
They will not count payments as income for those receiving alimony on their tax return filed in 2020.
3. Form W-4 Changes
For many years Form W-4 has been mostly the same, but all of this has changed over 2020. Form W-4 has been updated for 2020 and the IRS has mentioned:
“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.”
In fact, you must note that the allowances on FormW-4 are no longer used. In past years, the value of a withholding allowance was tied to the amount of personal exemption before recent tax law changes. Now that this has changed, inclusion of this on the form is no longer necessary. It is important to note that this form will need to be used by new employees to move forward. Current employees won’t be required to use the new form unless they change their employment.
4. Retirement Contribution Limits
The IRS raised employee contribution limits for401(k) accounts to $19,500 (from $19,000 in 2019). You can also make $6,500 in additional catch-up contributions if you are 50 or older, which is an increase of $500 over last year.
Note: the total contributions can not exceed $6,000 for standard and Roth IRAs, plus an additional $1,000 contribution fee for those 50 or older people, which is the same as in 2019.
Conclusion
While it may seem you have plenty of time to prepare your 2019 tax return, the better your tax preparation will be the sooner you start planning and knowing what to expect. Be sure to note the above updates, and keep an eye out for any others that could affect your small business.