Taxes can be confusing. And that's doubly true when the tax code changes from year to year, with shifting income thresholds and new credits and deductions.
But this time around, there is some good news when it comes to filing your tax return by April 15.
The changes you'll have to contend with for this year's return — covering income you earned in 2019 — are lot simpler than the ones you had to tackle last year, the first year affected by the 2017 Tax Cuts and Jobs Act, the biggest piece of tax legislation passed by Congress in a generation.
That said, if you want to get the most from your return, there are some tweaks you need to know about before filing, say experts. These include some new deductions that can help certain groups of taxpayers, and a bunch of changes to retirement-account rules that can impact your income, especially if you’re at or near retirement.
Here are the biggest changes you’ll see this year, whether you do your taxes yourself or hire a professional.
New thresholds for standard deduction and A.M.T.
This year’s changes to the standard deduction, the amount all filers who don't itemize are allowed to lop off the top of their taxable income, aren’t nearly as dramatic as when the deduction doubled under the T.C.J.A. But the amount you can write off has ticked up a bit. The standard deduction is rising from $12,000 to $12,200 for single filers, from $24,000 to $24,400 for married couples filing jointly and from $18,000 to $18,350 for head-of-household filers. The exemptions for the Alternative Minimum Tax also went up to $71,700 for single filers and $111,700 for married couples filing jointly.
New deduction for seniors and the blind
Taxpayers who are 65 or older, or blind, are eligible for new deductions via 1040-SR, a new tax form for seniors (and the legally blind). Single and head-of-household filers can take a deduction of $1,650, and married filers can take a deduction of $1,300. These deductions are per person, not per return, so a couple in which, say, both taxpayers are 65-plus can deduct $2,600.
SECURE Act changes retirement tax math
The biggest tax-related changes this year revolve around the SECURE (short for Setting Every Community Up for Retirement Enhancement) Act that went into effect at the beginning of 2020. Although this isn’t going to change the process of filing your taxes, it could have ramifications for your taxable income — for better or for worse.
People with traditional IRAs now have until the age of 72 to start taking minimum distributions, up from 70½. That "helps out a lot of people,” says Dean Borland, CPA and senior vice president at FineMark National Bank & Trust.
In theory, distributions should begin after retirement, when most people fall into a lower tax bracket. But as more Americans work into their traditional “retirement” years, taxpayers older than 70½ and still in the workforce were finding themselves with inflated tax bills because the combination of their work income and IRA distributions, which are also taxed as income, pushed them into higher tax brackets.
“It’s good for people who are in good health and don’t need the money right away,” says Mark Steber, chief tax officer at Jackson Hewitt Tax Service.
Another change to help working seniors is that people are no longer barred from making traditional IRA contributions past the age of 70½. Now, as long as you’re in the workforce and earning income, you can keep contributing with no age cap. (This is only true for IRAs, though, not 401(k)s. Investors have always been able to contribute to Roth IRAs at any age.)
But it’s not all good news: The SECURE Act also eliminated the “stretch IRA,” which let a person who inherited an IRA from someone other than a spouse to stretch out distributions over their lifespan. Now, that window has been shortened to 10 years.
“It’s kind of to the detriment of a person inheriting an IRA,” Borland says, because it means taxpayers could be forced to take — and pay taxes on — distributions while in their peak earning years and, consequently, in a higher tax bracket.
Retirement account contribution limits increase
Like the SECURE Act changes, new thresholds for retirement accounts don’t change the filing process, but they can help reduce your taxable income by increasing the amount of pre-tax income you can invest in qualified retirement plans. The new 401(k) contribution limit is $19,000, with an additional $6,000 in catch-up contributions allowed for workers over the age of 50. The contribution limit for an IRA is now $6,000, with an additional $1,000 in catch-up contributions.
Changes to alimony classification
If you got divorced anytime after Dec. 31, 2018, there’s a big change you need to know about in the tax treatment of alimony payments: Payers of alimony are no longer able to deduct payments made, and recipients no longer need to declare that money as income.
Obamacare mandate ends for federal tax filing
In 2019, the I.R.S. eliminated the individual mandate penalty associated with the Affordable Care Act, although Massachusetts, New Jersey and the District of Columbia have preserved their own versions for tax year 2019, and Vermont will start enforcing one in 2020. Essentially a tax on people who opted out of having health insurance, the mandate and associated payment was repealed as part of the T.C.J.A. and implemented in 2019.
Charitable giving via an IRA
One result of the T.C.J.A.’s doubling the standard deduction and reducing or eliminating many common deductions — including capping state and local tax (a.k.a. SALT) deductions at $10,000 — is that the number of taxpayers who itemize fell from roughly 30% to 10%. Among other things, this has ramifications for people who donate to charity.“People that make charitable donations are losing the tax benefit if they’re taking the standard deduction,” says Craig Wild, CPA and senior partner at Wild, Maney & Resnick, LLP.
One alternative for those ages 70-plus is to make a donation directly from your IRA to the charity of your choice. If done correctly, this qualified charitable distribution can satisfy your requirement to take minimum distributions from your IRA (while the SECURE Act pushed the age for RMDs to 72, you can still make a QCD starting at age 70 1/2). “That’s an indirect way to get a tax benefit,” he says, since that money won’t be counted as taxable income.
New disclosures of cryptocurrency activity added
With so many people getting into buying, selling and trading Bitcoin and other cryptocurrencies, it shouldn’t be a surprise to learn that the I.R.S. has taken notice. In its new Schedule 1 form released at the end of last year, the agency added a question: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
If you made a windfall trading cryptocurrencies, the taxman now expects to get his share. Although cryptocurrency might seem esoteric to some, as far as the I.R.S. is concerned, it's taxed the same way as other capital gains, Steber says. Short-term gains — on assets held less than a year — are taxed at regular income rates; if you sell after a year, your gains are taxed like any other long-term capital gains.
A host of tax breaks known as extenders expired in 2018, but Congress reapplied these provisions late last year and made them retroactive, meaning that taxpayers can go back and amend 2018 returns — although Wild cautions that you should carefully think through if it will be worth it in your particular situation.
“You really have to weigh the risk because you have a three-year statute of limitations,” during which the I.R.S. can audit you, he says. Filing an amended return re-starts that look-back period. Especially for people with complex returns, lengthening the amount of time during which you can be subject to an audit might not be worth the risk, he says. “Do you want to extend the statute of limitations for another three years for a small refund?”
Here are some of the renewed extenders flagged by tax experts:
•PMI: Taxpayers can deduct the cost of private mortgage insurance.
•Education expenses: You can deduct up to $4,000 for qualified college costs including tuition and fees. Since this is an above-the-line deduction (which means you can take it in addition to the standard deduction), Steber says it can be a good option for people who don’t itemize but still have college costs. For taxpayers with income below $65,000 ($130,000 if you’re married and filing jointly), you can deduct $4,000 in applicable expenses; if your income is between $65,001 and $80,000 ($160,000 for married filing jointly), you can deduct $2,000.
•Mortgage debt forgiveness exclusion: Bad debt written off by lenders is counted as income, but an extender excluded mortgage debt forgiveness from this mandate. “It’s often a double-whammy to taxpayers who are already in dire financial straits,” Steber says. Given the high-dollar amount of foreclosures, these borrowers are one category of taxpayer for whom filing an amended return could make sense, he says. "Anyone who had a debt foreclosure in 2018 got a big 1099-C they had to count it as income. Now, they can go amend that return and pull that off."
•Medical expenses: The threshold for being able to take deductions for medical expenses was lowered from 10% of adjusted gross income to 7.5%.
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(This story was updated to clarify the description of how to use an IRA for charitable giving.)