As Mark Twain once famously stated, “the secret to getting ahead is getting started.” This quote is applicable across all aspects of life, with the 2020 tax season being no exception. Whether you are unaware of the new changes being made to your next tax return or need a brief refresher on the details, the accounting & financial experts at SD Associates are shedding some light on the most common tax problems you could be facing in 2020:
1: Filing Late Penalties
Statistics show that 1 in 5 people file their taxes either after the due date or neglect to file altogether. While it’s common knowledge that avoiding to file will result in consequences with the IRS, there are expected to be just as many people making this mistake—if not more – this upcoming season. Avoid being penalized for filing late by getting ahead with our experienced accountants.
2: Retirement Contribution Limits Change
The new tax season brings new changes to the retirement contribution limits. Individuals are able to put away more money in their tax-advantaged retirement accounts, possibly decreasing their tax liability. Tax year 2020 contribution limits are as follows:
- The IRS has raised the employee contribution limit for 401(k), 403(b) and most 457 plans to $19,500, up from $19,000 in 2019.
- If you are 50 or older, you can put away another $6,500 in your workplace retirement plan. That’s up from $6,000 in 2019.
- The contribution limit for individual retirement accounts, whether traditional or Roth, is holding steady at $6,000, plus another $1,000 for those that are 50 and over.
3: Estate and Gift Taxes
For 2020, the lifetime gift and estate tax exemption will be $11.58 million per individual, up from $11.4 million in 2019.
The annual gift exclusion (the amount you can give to any other person without it counting against your lifetime exemption) will hold steady at $15,000 for 2020.
4: Alterations to Health Savings Account (HSA) Limit
These accounts allow you to put away pretax or tax-deductible money and have it grow free of taxes. You can take a tax-free withdrawal to cover qualified necessary health expenses.
In 2020, you can save up to $3,550 if you’re an individual with self-only health coverage. That’s up from $3,500 in 2019. Account holders with family plans can save up to $7,100 in this account (up from $7,000 in 2019).
5: Threshold of Medical Expenses Deduction
In 2017 and 2018, the threshold for medical expense deductions was decreased to 7.5% by the Affordable Care Act. Effective January 1, 2019, the threshold will increase to 10%. For those taxpayers that itemize their deductions, this will make it a bit more difficult for them to qualify for the medical expense deduction, even though it may not seem like a drastic increase.
6: Confusion Over Alimony Deduction
The Tax Cuts and Job Act eliminates the alimony deduction this year, if made under a divorce or separation agreement executed after Dec. 31, 2018. Being unaware of this change can cost people up to thousands of dollars, so taxpayers should keep an eye out for this change and/or speak with their accountant sooner rather than later.
7: No IRS Penalty for the Individual Mandate
Starting with the 2019 tax year and into 2020, the Shared Responsibility Payment no longer applies.
Some states have their own individual health insurance mandate, requiring you to have qualifying health coverage or pay a fee with your state taxes for the 2019 plan year. If you live in a state that requires you to have health coverage and you don’t have coverage, you’ll be charged a fee. Please consult with us if you have any questions or concerns.
8: Failure to Report All Income
The rapid rise in “under the table” jobs means there are more people that have been slipping by with unreported income. Most people receive penalties right off the bat, while some will be faced with penalties later on. As a resource, our website is equipped with financial calculators to help you understand your income breakdown to avoid leaving anything out.
9: No Quarterly Estimated Taxes
As our society fosters more freelancers and independent contractors, taxes must be paid as you earn or receive income during the year, through estimated tax payments. If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
10: Underpaying Estimated Tax Payments
For a beginner or inexperienced freelancer or independent contractor, making sure that you report correct amounts is a necessity this tax season. Some advice to avoid underpaying your estimates includes being organized and overestimating the totals rather than underestimating. It’s recommended to allocate 22-25% of each payment you receive into a separate savings account in case of any estimated tax payments that must be made during the year.
Don’t fall victim to penalties or changes this upcoming tax season. SD Associates is here to support you with a variety of tax services to keep you focused on your business and less concerned about the little things in between. Contact us today for a successful tax season.
If you’re looking for assistance, our highly qualified shareholders at SD Associates offer consulting services that will steer you down the correct path towards a successful & uneventful tax season.