You’re probably just getting started to organize your 2019 tax return. That makes it the perfect time to start planning for 2020.
There are a number of changes to the tax law in 2020 and the sooner you can plan for them, the less you’ll owe in taxes.
Tax planning isn’t something that you wait to do until it’s time to file your tax return. It’s something that you do all year long. What are the major tax law changes that you need to know for 2020?
Read on to find out.
Income Tax Brackets Have Changed
Do you know how many different tax brackets there are? Do you know which tax bracket you fall under? About half of Americans can’t answer these two questions. The complicated tax code doesn’t make it easy to understand. Yet, these are the most important ones to know because they dictate how much income tax you pay. There are 7 tax brackets, and each bracket is different depending on your filing status.
The IRS adjusted these brackets to account for inflation.
A person with a single filing status making between $40,125-$80,524 falls in the 22% income tax bracket. For people who are filing returns as married filing jointly, the income for this tax bracket is $80,250 – $171,049.
You’ll want to check with the IRS to discover what the income tax brackets are and what you can expect to pay in income taxes in 2020.
The Standard Deduction Increases
Another change to the tax law in 2020 is the amount you can take as the standard deduction. This amount doubled with the 2017 Tax Cuts and Jobs Act, and it has been increased slightly to adjust for inflation.
For single people, the standard deduction goes up $200 to $12,400. Head of household filers have a $300 increase to $18,650. People who are married filing jointly have a $400 increase and can take $24,800 as a standard deduction.
Estate Tax Planning
If you plan to leave an estate after you’re gone, you should start planning for that now. The federal government can tax up to 40% of your estate, and there are state taxes, too.
You can gift a certain amount of money to family members each year, which is maxed out at $15,000 per person. During the course of your lifetime, you can gift up to $11.58 million, which is an increase over 2019.
You Can Save More for Retirement
As you put money aside for retirement, you are allotted more money you can set aside in a 401(k) or 403(b) plan that’s tax-free.
In 2019, the maximum you could put into a retirement fund without paying taxes on that income was $19,000. In 2020, you can put up to $19,500 into retirement.
People over 50 have a greater need to save up for retirement, and they’re more likely to be in a higher tax bracket. You can save an additional $6500 tax-free if you need to catch up on your retirement savings.
What if you have an IRA account? The annual contribution limit is $6,000 and that hasn’t changed from the 2019 limits.
Changes to State Tax Laws
As if federal tax law isn’t complicated enough, many states have had adjustments to their own tax laws. There are 35 states that have changes in their tax laws that take effect on January 1, 2020.
A handful of states are changing their laws to collect more in sales taxes on ecommerce purchases. Some have changed the corporate tax rate, and others have changed their income tax brackets.
You need to take a look at your state’s tax laws by checking with the Department of Revenue in your state.
Tax Planning Strategies
No one wants to pay more in taxes than they should. You also want to make sure you take advantage of every legal opportunity to lower your tax bill.
That’s why tax planning and understanding tax law is so important. How can you get ahead on your taxes for 2020? Here are some tips to get started.
Use 2019 as a Guide
Take a look at your 2019 and 2018 taxes. See how much you earned and how much you paid in taxes. You also want to take into account any increases in taxes paid and changes in income.
This will give you a guideline as to how much taxes you can expect to pay in 2020. The final step is to double-check your withholding. You may want to increase the amount of taxes withheld from your paycheck if you owe money in April.
Plan for Major Life Events
The next step is to plan for major life events. If you plan to purchase a home, you may have a number of tax deductions available.
Are you planning to start a new business? The way you file taxes will be totally different. You’ll file Form 1040, but you’ll also file a Schedule C form with all of your business deductions.
You may be responsible for self-employment taxes, as well. There are a number of factors that go into that, such as your business structure and your income.
Work with Professionals
The best way to plan for taxes is to work with a professional. You aren’t an expert in tax law, and you probably don’t have the time to learn the thousands of pages of tax law to plan accordingly.
A tax professional like a tax attorney can assess your situation and help you create a long term plan to account for life changes. Read more to learn how tax attorneys can help you.
Tax Law Doesn’t Have to Be Complicated
Tax law isn’t easy to understand. However, the more you know, the more you can save on your tax bill each year.
You need to create a tax plan throughout the entire year. That starts with understanding how tax law changes from year to year. There are some adjustments for inflation and state laws are always changing. If you want to stay on top of all of the changes, work with a professional.
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