The beginning of a new year means that taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers should start planning for federal tax changes that took effect as of January 1. Statutory rules and the recent budget deal passed by Congress last month set the stage for changes that taxpayers must navigate in the upcoming tax year.
As provided under federal law, the Internal Revenue Service (IRS)The Internal Revenue Service (IRS) is part of the U.S. Department of the Treasury and is responsible for enforcing and administering federal tax laws, processing tax returns, performing audits, and offering assistance for American taxpayers. calculates relevant adjustments to income brackets, deduction amounts, and credit values for federal personal income taxes and capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. es, among other taxes. Additionally, as we look ahead to changes for the 2020 tax year, retirement accounts that provide tax deferral benefits, such as 401(k)s and individual retirement accounts (IRAs), have higher contribution limits as they are indexed to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. (specifically, the Chained Consumer Price Index, or C-CPI). This counters the eroding value of the contribution limits over time.
Source: Internal Revenue Service
|Type of account||2019||2020|
|401(k) employee contribution||$19,000||$19,500|
|401(k) catch-up contribution||$6,000||$6,500|
|401(k) employer contribution||$37,000||$37,500|
|IRA – traditional and Roth||$6,000||$6,000|
|IRA – traditional and Roth, catch-up contribution||$1,000||$1,000|
|Health savings account (HSA), self-only||$3,500||$3,550|
|Health savings account (HSA), family||$7,000||$7,100|
|SEP IRA employer contribution||$56,000||$57,000|
|Simple IRA employee contribution||$13,000||$13,500|
|Simple IRA employer contribution||$43,000||$43,500|
|Roth income limit (AGI)||$122,000 (Single), $193,000 (Joint)||$124,000 (Single), $196,000 (Joint)|
Beyond indexing elements of the federal tax code for inflation, tax year 2020 will see an extension of provisions that were set to expire (or already expired) in 2019 thanks to the congressional December budget deal, including an extension of the Work Opportunity Tax Credit (WOTC), the New Markets Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , and the employer credit for paid family and medical leave.
A handful of provisions created under the Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. of 2017 were also set to expire beginning in tax year 2020, such as reforms to alcohol excise taxes. This provision was extended through tax year 2020 last month. While most TCJA provisions remain in place, taxpayers and policymakers should begin looking forward to 2021, when portions of the business provisions begin to expire, such as the full expensing of research & development costs and a more permissive interest deduction regime.
As part of the federal budget deal in late December, policymakers also changed tax laws surrounding retirement accounts. For example, the age when someone must take required minimum distributions from retirement accounts went up from 70½ to 72, and the age limit for making traditional IRA contributions was eliminated. Policymakers also expanded the availability of multiple employer plans (MEPs), which allows smaller businesses to provide retirement plans at lower cost.
All of this suggests that while the tax code has not radically changed from the previous year, certain groups of taxpayers will see meaningful changes in their tax plans and tax liability in 2020. This also foreshadows larger expected changes in the tax code in 2021 and 2022 as provisions created by the TCJA begin phasing out, which will affect long-term investment and saving decisions.
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