By Barbara O’Neill, Ph.D., CFP®, [email protected]
Are you getting ready to file your federal income tax return? 2020 is the second tax filing season following the Tax Cuts and Jobs Act (TCJA). Because of the TCJA, over 25 million taxpayers claimed the standard deduction instead of itemizing deductions on their 2018 tax returns last year. The share of tax returns with Schedule A forms for itemized deductions dropped from about 30% to about 10% of taxpayers.
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More people took the standard deduction in 2018 because it exceeded the amount that they could itemize. The most commonly reported itemized deductions are state and local taxes (commonly referred to as SALT and capped at $10,000), charitable donations, and mortgage interest. Large qualified, unreimbursed medical expenses in excess of 10% of adjusted gross income are another allowable itemized deduction.
About 1.6 million people who received tax refunds in 2018 owed the federal government money during the 2019 tax filing season. TCJA changes were confusing to many taxpayers and over 20% did not withhold or estimate enough taxes in 2018. In 2019, the IRS relaxed the penalty for not having enough tax withheld for 2018 taxes and lowered the threshold from 90% of tax owed to 85%.
Below are six steps to consider during the upcoming 2020 income tax season:
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Learn About 2019 Tax Form Changes
Federal tax bracket income ranges and standard deductions were indexed for inflation. The 2019 standard deduction was $12,200 for single filers and $24,400 for married couples filing jointly, with an extra $1,300 for taxpayers age 65+. The penalty for not having health insurance went away but some states- New Jersey, Massachusetts, and the District of Columbia- have state penalties.
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Check Your Tax Withholding for 2020
The IRS introduced a new, more accurate, Tax Withholding Estimator calculator which is more accurate and includes options for different tax filing status categories and income sources. To use the calculator effectively, estimate your 2020 income and the amount of itemized deductions, if applicable. www.irs.gov/individuals/irs-tax-withholding-estimator
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File a New W-4 Form
A draft of a redesigned W-4 federal income tax withholding form for 2020 was announced in 2019. The 2020 form eliminates the term “withholding allowances” and, instead, includes a five-step process with steps 2 through 4 being optional. Eliminating allowances aligns with the suspension of personal exemptions from 2018 through 2025 due to the TCJA.
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Check Out Form 1040-SR
The new tax form 1040-SR, was unveiled by the IRS in 2019 and is available for filing 2019 taxes in 2020. It is a simplified version of the 1040 form designed for seniors. The form has a larger font size, better color contrast and a prominent chart for calculating the standard deduction. Taxpayers who use the new form must be at least 65 but not necessarily retired.
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Review New Supplemental Schedules
2018 tax returns included six schedules that were supplemental to the 1040 form. For 2019, the schedules were reconfigured and there are now only three supplemental schedules. Some items from the prior year forms were combined in an effort to simplify the tax filing process. Get familiar with the new schedules before filing your tax return.
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Get Help When Needed
Sources of taxpayer assistance include Volunteer Income Tax Assistance (VITA) programs, non-profit agencies and legal clinics that provide tax assistance, IRS tax offices, the IRS Help Line (800-829-1040), the IRS Free File program, tax software, commercial tax preparation firms, certified public accountants (CPAs), and tax attorneys (for very complex tax returns).
