Tax Day 2020: 5 Important Things to Know

About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals. 

For many Americans, tax season has taken a back seat to the recent COVID-19 pandemic and volatile economic situation But as you prepare to file for the 2019 tax season this year, there are a few important changes to keep in mind.

Last year was the first tax season affected by the recently passed Tax Cuts and Jobs Act of 2017, meaning taxpayers are still getting used to the changes this legislation brought on. But since filing last year, a few additional changes have occurred, which we’ll discuss below.

1. COVID-19’s Impact on Tax Season

With the coronavirus impacting each of our lives (whether directly or indirectly), it’s important to be aware of the changes taking place and how they may help, or hinder, your ability to file your taxes. The Tax Filing Relief for America Act was recently passed, which extends the 2019 tax filing deadline from April 15, 2020 to July 15, 2020.¹  Please be mindul that your Stat might have a different deadline that is prior to the Federal deadline. With so much confusion amid the recent outbreak, this extension will allow individuals to take extra time, if needed, to file confidently.

2. IRA Contribution Limits

If you haven’t taken advantage of contributing to your IRA this tax year, now may be an ideal time to make a contribution. As a reminder, Traditional IRAs offer the tax advantage of reducing your taxable income for the year, as the amount is taxed once the money is withdrawn in retirement.

The contribution limits for IRAs and 401(k)s have increased this year. Eligible employees interested in contributing to their employer-sponsored 401(k), 403(b), 457 or Thrift Savings Plan can contribute up to $19,000 - an increase of $500 from last year’s $18,500 limit.²

Before this year, the contribution limit for IRAs hadn’t increased since 2013. With a previous limit of $5,500, individuals can now contribute up to $6,000 to their IRA account. Catch-up contributions for those over the age of 50 remain at an additional $1,000, or $7,000 total.² 

3. Simplified Tax Standard Deductions

One of the more notable changes brought on by the Tax Cuts and Jobs Act of 2017 was the increase in standard tax deductions for taxpayers. The increased deduction reduces taxable income for every household before heading to the next set of filing provisions. While taxpayers are still able to itemize, this change was introduced in part to encourage more taxpayers to take the standard deductions offered.

In 2019, the standard deduction amounts increased to:

• Single or married filing separately: $12,200
• Married filing jointly or qualifying widow(er): $24,400
• Head of household: $18,350³

4. Health Insurance Penalty

In the previous year, taxpayers were at risk of receiving a penalty if they did not have health insurance. While there’s been a lot of political back and forth regarding the Affordable Health Care Act, the IRS has removed the penalty for the 2019 tax season. Previously per the Tax Cuts and Job Acts of 2017, taxpayers would be required to pay $695 if they couldn’t provide proof of coverage.⁴ 

5. Tax Bracket Adjustments

As you determine what tax bracket you fall into, it’s important to know that there have been some small adjustments to the brackets themselves. The tax rates, however, have stayed the same.

While reviewing the table below, it’s important to remember that the tax rate is not a flat percentage. For example, if you make $50,000, you are not taxed a flat rate of 22 percent. Instead, the first portion is taxed at 10 percent, the next part at 12 percent, and the remaining amount up to the $50,000 is taxed at 22 percent.⁵

Tax Brackets & Tax Rates For 2019⁵

As you prepare to file your tax return this year, it’s important to remain up-to-date on recent changes that have taken place. While this year’s tax deadline has been extended, remember to meet with your CPA or trusted financial professional early to thoroughly prepare for the July 15 deadline.

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