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Ways Your Taxes will Change in 2020

Even though the New Year is just upon us, and we are working diligently to get our taxes filed for 2019, it is also time to start looking ahead to the 2020 tax year. As it happens, just before the holidays, two important pieces of tax legislation were passed as part of a year-end appropriations package. The first of these two bills, The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was intended primarily to expand opportunities for individuals to increase their retirement savings, although the bill contained several non-retirement related tax provisions. The second bill, The Taxpayer Certainty and Disaster Tax Relief Act of 2019, provided tax relief for victims of natural disasters and extended a number of popular expired and expiring tax breaks. 2020 also marks the third full year of the Tax Cuts and Jobs Act (TCJA), and while very little has changed from 2019, many of the deduction limits, etc. have been adjusted for inflation.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act)

The SECURE Act makes a couple of significant enhancements to the 529 Plan rules. The first allows taxpayers to use 529 withdrawals to pay for Apprenticeship Programs which are appropriately registered and certified with the Department of Labor. Fees, books, supplies, and required equipment for those Apprenticeship Programs are all considered qualified education expenses.

The second tweak to the 529 Plan rules lets individuals use plan funds for “Qualified Education Loan Repayments.” Plan distributions may be used to pay principal and/or interest of qualified education loans up to a lifetime per-person limit of $10,000.

The SECURE Act also undoes changes made to the Kiddie Tax (Tax on Unearned Income of Certain Children) by the TCJA. The new (old) rule states that any unearned income subject to kiddie tax is taxable at the parents’ marginal rate. The change introduced by TCJA taxed the child’s unearned income, not at the parent’s rate, but at the higher trust tax rates. The reversion to the old (pre-TCJA) rule is effective for 2020, however, for 2019 returns, taxpayers may use whichever rates are more favorable.

Taxpayer Certainty and Disaster Tax Relief Act of 2019

Designed to benefit residents of federally declared disaster areas, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 extends a number of popular tax breaks. None of the provisions are new, and while the effective dates changed, they all lapse again at the end of 2020.  Most of the expired provisions were reinstated back to 2018, and taxpayers may amend previously filed returns to request refunds.

The extended provisions include:

  • exclusion of income from discharge of debt from principal residence (up to $2 million)
  • mortgage insurance premiums deductible as home mortgage interest
  • above-the-line deduction for qualified tuition and fees
  • cumulative credit of up to $500 credit for nonbusiness energy improvements (home windows, storm doors, etc.)
  • credit of 10% for 2-wheeled plug-in electric vehicles
  • Work Opportunity Tax Credit (WOTC) which allows a tax credit for hiring and retaining certain groups of employees is now extended through 12/31/2020 (was set to expire 12/31/2019)

The bill also extends through 2020, the 2018 treatment of qualified medical expenses, which means they are deductible to the extent they exceed 7.5% of AGI, not 10% as scheduled.

Tax Cuts and Jobs Act (TCJA) Updates for 2020

Finally, more than 60 tax provisions of the TCJA have been adjusted for inflation including:

  • ­­Standard Deduction Amount up from $24,400 to $24,800 (married filing joint) and $12,200 to $12,400 (married filing separate or single) and $18,650 (head of household) up $350 from 2019.
  • 401k contribution limit is increased from $19,000 to $19,500 and catchup contribution limit for those over 50 is now $6,500
  • Allowable HSA contributions go from $3,500 to $3,550 (self-only) and from $7,100 to $7,500 (family)
  • Marginal rates remain the same and range from 12% to 37% although bracket amounts are adjusted for inflation

As you can see from this short overview, nothing about tax law is simple and unchanging. Each year brings its own peculiarities, and this is by no means an all-inclusive list. If you have questions about anything you read in this article or how these acts may impact your tax situation, please contact your local Blue & Co. advisor.

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