It’s almost that dreaded time of year again when we have to start preparing to file our taxes. For many of us, this process might already be well underway. In reality, tax season 2020 may be the last thing that any of us wants to think about, but it’s important to stay on top of it. Waiting until April to file will make it much harder to meet with frantic tax advisors and find all of the documents you need, all while that sound of the clock is ticking inside your head.
Preparing ahead of time can help keep your taxes and any potential issues from sneaking up on you. So, let’s talk a little bit about the big changes for tax season 2020. After all, the last thing you want when it comes to your taxes is a surprise (unless it’s a refund, of course)!
The deadline to file your 2019 taxes is Wednesday, April 15, 2020. This is the same date as always (April 15 of each year), but we just felt it was worth a quick reminder.
Now, here are the main things that actually will be different:
1. Individuals and families will no longer be penalized if they didn’t have health insurance coverage for the full previous year
If you haven’t had health insurance over the last few years, this is likely to be the biggest difference you’ll notice when you’re filing for the 2020 tax season. The penalty under the Affordable Care Act for not keeping consistent health care coverage was $695 as of 2018, but changes took place for the 2019 tax year that eliminated this penalty altogether. So, if you’re one of the many who lost nearly $700 each year in the past, you can rest easy knowing this is no longer the case.
You can use those savings to set aside for other fees that you’ll owe the Internal Revenue Service (IRS), an all-cash holiday season, padding for your savings account, or start prepaying on your loans or mortgage. If you choose to prepay, just be aware of any potential prepayment penalties first. You can also use it to establish a new health insurance plan if you haven’t done so already. Despite the removal of the penalty, it’s still important to have.
2. Standard deduction amounts have increased: $12,200 for those filing singly and $24,400 for couples who are married and filing jointly
Simply put, the standard deduction is a reduction in the amount you owe in taxes. You can choose to either take the automatic standard deduction or itemize your deductions and calculate them one at a time. Itemizing your deductions will naturally require more effort, but if you know that this amount will be more than you’d get with the standard deduction, it’s worth it.
Here are a few cases where it may make more sense to itemize:
Otherwise, most filers choose to take the standard deduction. Your tax advisor can help you decide what’s better for you, but for now, here is the standard deduction breakdown and how much it has increased, so you have an idea of what you’re looking at:
3. In 2019, income tax brackets increased in order to account for inflation
Because your tax rate (how much you pay in taxes) is calculated based on your tax bracket (your income range), this has the potential to be an important change. But since the brackets have barely been adjusted (a few hundred dollars at most), it won’t make much of a difference for most people, especially if your marital status and income is the same as the previous year.
4. Exemption and deduction changes
When you inherit property or money, you’ll have to pay a tax on it called the estate tax. Beginning in 2019, the estate tax exemption amount has increased: in 2018, you could inherit any amount up to $11.2 million before it would suffer a 40 percent tax; in 2019, you could inherit up to $11.4 million before being subjected to the same rate.
The deduction for medical expenses has also changed. In previous years, it was possible to deduct out-of-pocket medical costs and related expenses that had not been reimbursed and that added up to more than 7.5 percent of your AGI (adjusted gross income). AGI is calculated by subtracting your other deductions from your total income. Starting for the 2019 tax year, this number has to add up to 10 percent of your AGI.
There are some changes that went into effect last tax season that you’ve already faced, but since the changes are still relatively new, we thought it couldn’t hurt to offer a quick reminder:
Now that you know that the major changes aren’t all that major after all, it should help to ease some of the pressure you’ve been feeling. But we know that you may still be feeling some stress while you get ready to file your taxes, so here are two suggestions for keeping the stress to a minimum for a more successful tax season:
1. Start collecting your documents and numbers now
Don’t wait until the very last minute to collect your W2s, 1099s, K1s, donation write-offs, receipts, forms for credits and deductions, and any other forms you may need to file your taxes this year. Whenever we move, reorganize, or make financial changes, it’s easy for things to get lost in the shuffle. The documents you thought were in that old shoebox in the closet may be hiding somewhere else. Give yourself some time to get everything together so that you’re not panicking the day before your meeting with your tax advisor.
2. Start setting money aside if you know you’ll owe the IRS after you file
It may be helpful to set money aside even earlier than January, so that’s something to consider moving forward into the new year. The holidays are a wonderful time full of delicious foods and magical moments with loved ones, but they’re also known for chipping away at your financial health. You can start preparing for tax season earlier by spending less in November and December and setting that aside for your tax payments. This holiday survival guide will help you get through the season with your finances intact.
For now, however, you can start by setting aside a little bit each week to put toward your taxes. If nothing has changed, you can expect to owe about the same amount as the last time you filed, so divide that up by the number of weeks you have left and start saving. This will make the amount you owe feel much less devastating when the time comes. And, if you have some money leftover, consider paying ahead on your Spotloan, as there is no penalty for early repayment and you will save money in interest.