Every year, the IRS updates their tax filing guidelines. This includes changes to tax rates for different income limits, tax deductions, credits and more. The reason these guidelines are updated so frequently is partly because of inflation. Changing economies and growth require the IRS to update how much we all pay in taxes. Below, we’ve outlined some of the most notable changes to the 2020 tax code that affect your filing in April 2021.
Standard Deduction Changes
A tax deduction is something you can reduce your taxable income by. By lowering your taxable income, your tax bill is much lower.
The IRS knows that you likely make donations and perform other tax-deductible activities throughout the year. Instead of having to tell the IRS about all these things, they instead offer a standard deduction. It’s a fixed deduction amount that makes filing easier for most Americans. In fact, about 90% of families claim the standard deduction each year.
The 2020 standard deductions are even higher than they were last year.
Standard deductions are now:
- Single/Married Filing Separately: $12,400 — up from $12,200 in 2019
- Married Filing Jointly: $24,800 — up from $24,400 in 2019
- Heads of Household: $18,650 — up from $18,350 in 2019
This means if you earn $40,000 per year and file your taxes by yourself, your standard deduction is $12,400. Your total taxable income would be $40,000 – $12,400, or $27,600.
Charitable Deductions And COVID-19
It seems like eons ago. But there were significant changes to the tax code in 2017 regarding charitable contributions. Anyone is allowed to deduct charitable contributions from their taxable income. However, that became much less common after 2017. Itemizing your deductions made less and less sense for middle class families. The standard deduction often covered much more than you could ever get by itemizing everything. As a result, deductions for charitable donations are much less common.
However, the 2020 CARES Act, or the Coronavirus Aid, Relief, and Economic Security Act, has one small revision. You can now deduct up to $300 in charitable donations for this year. This is on top of your standard deduction amount. This may not add up to much, but if you’re making donations, take the deduction!
2020 Tax Brackets are Higher
It’s no surprise that income tax brackets increased this year. It happens almost every year. The new tax brackets for 2020 are:
- 37% on income more than $518,400
- 35%: on income more than $207,350 and less than $518,400
- 32%: on income more than $163,300 and less than $207,350
- 24%: on income more than $85,525 and less than $163,300
- 22%: on income more than $40,125 and less than $85,525
- 12%: on income more than $9,875 and less than $40,125
- 10%: on income less than $9,875
HSAs have higher limits this year
An HSA, or health savings account, is a special type of tax-advantaged savings account. You can contribute to an HSA through your employer. It deducts money before you’re taxed and puts it in a separate account. But is there a catch? Your HSA has to be used for eligible medical expenses.
If you’re an individual, that limit went up $50 this year to $3,550. If you have your family covered in your HSA, the new limit is $100 higher. It is now $7,100.
Retirement Account Contribution Limits
Your workplace retirement account probably had a crazy year. Between changing contribution amounts and a rising stock market, it’s probably time to revisit your retirement contributions in general. This year, some retirement accounts have new contribution limits.
For 401k retirement plans, contribution limits are a bit higher. You can now contribute up to $19,500. If you’re over the age of 50, there are catch-up contributions of up to $6,500. That’s up from $6,000 last year.
Saver’s Credit Limits
The saver’s credit is a little known tax advantage. If you have a low enough income, you can get a tax credit for contributing to an eligible retirement account. These accounts include Roth IRAs, 401ks, and more.
The math isn’t complicated, but there are stipulations for how much of a credit you can get. Income limits and contribution amounts all affect how much of a credit you can get. The IRS has an easy chart for saver’s credits showing which incomes qualify.
In brief, the income limits include:
- $65,000 if you’re married and filing jointly
- $48,750 if you’re filing as the head of household
- $32,500 for most other filing statuses
Obviously, in addition to federal income taxes, you may also have to file tax returns in your state. State tax varies state by state.
If you’re like most Americans, you can expect to get a tax refund this year. Whether you take the standard deduction or itemize, the 2020 tax year will be one for the books. Changes to the tax code, CARES Act payments, and unemployment for some, taxes will likely look very different this year for most.
The IRS may issue extensions to filing 2020 taxes at the time of writing this post.
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