Higher 401(k) limits, stimulus payments, COVID-19 distributions and more
COVID-19 caused the Treasury Department and the Internal Revenue Service to extend the 2019 federal income tax filing deadline from April 15, 2020, to July 15, 2020. That means that taxpayers could defer federal income tax payments, without penalties and interest, no matter how much they owed. This change applied to all taxpayers, including individuals, corporations, trusts, estates as well as those who pay self-employment tax.
But whether or not you took advantage of the new July 15th date, the reality is that there are quite a few new tax changes for this year. Many of the changes were covered extensively in the press, like the elimination of the tax penalty for those without health insurance.
But others are not as well known or as easily found in the 2,500+ pages of the Tax Code. And while the Tax Cuts and Jobs Act passed in late 2017 created huge tax changes and most of those changes were already rolled out last year, there are still quite a few changes impacting 2019 taxes and even 2020 taxes.
But remember, like your personalized financial plan, everyone’s tax filing is different, so don’t consider this tax advice. Here are a few of the changes to keep in mind for this year.
Stimulus Payments Not Taxable
Your $1,200 ($2,400 for couples) stimulus payment is an advance refundable tax credit on 2020 taxes. What this means is that no matter how much you owe or don’t owe, you get to keep all of it and do not have to pay taxes on it.
The amount of your stimulus payment was based on your adjusted gross income (AGI) for either 2018 or 2019, but actually applies to your 2020 AGI.
But if your 2020 adjusted gross income is greater than your AGI for 2018/2019, you get to keep the extra. And if your 2020 AGI is less than your 2018/2019, you can claim the additional amount owed when you file your 2020 taxes.
Just keep in mind that your stimulus check is not taxable.
New Coronavirus-Related Distributions
The CARES Act allows for “Coronavirus-related Distributions” which allow participants in IRAs and retirement plans the ability to take a qualifying withdrawal and pay those funds back without tax or interest over a 3-year period. The withdrawal is subject to a $100,000 limit.
There are qualifications for Coronavirus-Related Distributions, however, including:
• Personal, spouse or dependent diagnosis with COVID-19
• Quarantined, furloughed, laid off, or work hours reduced because of COVID-19
• Unable to work due to lack of childcare due to COVID-19
• Own a business that is closed or has reduced hours due to COVID-19
• Other factors later specified by the IRS
For those unable to meet the Coronavirus-Related Distributions criteria, withdrawals from retirement plans are allowed in the form of loans.
Generally speaking, those loans need to be repaid over 5 years and cannot exceed $50,000 or half the vested account value, whichever is less. That amount is now doubled so that one can take a loan up to $100,000 or half of the vested account value, whichever is less. The loan still needs to be repaid, but payments can be deferred up to 1 year after the loan is taken.
Waiver of 10% Withdrawal Penalty
The 10% penalty for early withdrawals from IRAs and retirement accounts is being waived for 2020, subject to a maximum allowable withdrawal of $100,000.
Withdrawal amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.
Required Minimum Distributions
For 2020, individuals expected to take Required Minimum Distributions will not be required to withdraw that amount from their IRA or retirement plan.
This includes your first RMD if you reached age 70½ during 2019.
Higher 401(k) Limits
• If your employer has a 401(k) plan, you can invest up to $19,000 for 2019 and $19,500 for 2020.
• And if you’re over 50, you can contribute up to $6,000 more in 2019 and $6,500 in 2020.
• The contribution limit for SIMPLE retirement accounts for 2019 is $13,000 and will be raised to $13,500 in 2020.
New IRA Rules
Last year, we could not make new contributions to IRAs after we reached the age of 70 ½. But starting this year, we can keep contributing to a traditional IRA beyond that age.
Income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs will all increase for 2020.
The extension of the tax-filing deadline to July 15th enables one to contribute to a traditional IRA or HSA for 2019 and possibly get a tax deduction for the 2019 tax year.
New Use for 529 Plan Savings
529 savings plans now allow funds to be used for qualifying educational expenses at any level, not just for college.
Capital gains tax rates are either 0%, 15% or 20% for most assets held for more than a year.
Capital gains tax rates on most assets held for less than a year correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).
Deductions, Credits and Relief
• The standard deduction for married filing jointly is $24,400 and will rise to $24,800 for tax year 2020
• For single taxpayers and married individuals filing separately, the standard deduction is $12,200 and it will rise to $12,400 for 2020
• For heads of households, the standard deduction is $18,350 and it will rise to $18,650 2020
• There are no personal exemptions in the 2019 tax year
• The Child Tax Credit is $2,000 per qualifying child for single filers and married couples with no upper limit
• Mortgage interest is still deductible up to $750,000 in principal
• Obamacare’s individual mandate penalty tax is eliminated
• The student loan interest deduction allows you to deduct up to $2,500 from your taxable income if you paid interest on student loans in 2019
The Tax Code is Huge
Politicians and late-night comedians routinely rant that the federal tax code is too long – and they’re not wrong. At over 2,500 pages, that’s more than double the length of War and Peace, written by Leo Tolstoy.
However, the tax code is only the beginning when it comes to fully understanding the entire tax picture. Think about this: there are thousands more pages from the IRS clarifying how U.S. tax statutes work and there are almost 60,000 pages of tax-related case law.
Further, according to estimates from the Office of Information and Regulatory Affairs, Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements. This is the equivalent of almost 4.3 million full-time workers doing nothing but tax return work! Translated into dollars, that 8.9 billion hours computes to $409 billion each year!
The point is that a lot of people get help with their taxes because taxes are complicated. But while you might work with a tax preparer, make sure you also consult with your financial advisor to determine how the new tax changes might impact you and your family.
Because as the late Steven LaTourette so aptly said: “Our tax code is so long it makes War and Peace seem breezy.”
If you feel like your long-term tax plan, as it fits into your overall Financial Life Plan, could use a fee-only financial planner and fiduciary by it's side, I'd be happy to help. Please schedule an Intro Call here!
Sources: IRS.gov; whitehouse.gov