Still have not filed your taxes? Get started on all those W-2s, 1099s, and other paperwork in time for the April 15th tax deadline.
And if you’re working on your taxes, there are some tax changes that you’ll need to be aware of.
So, before you get too far in organizing your taxes, read on to learn more about the tax changes you might encounter.
1. No more health insurance penalties (sort of)
Healthcare plays a big role in the IRS’ altered income tax filing rules. One of the most noteworthy changes is the elimination of the Affordable Care Act individual mandate penalty.
In plain English: You’ll no longer have to pay a penalty if you don’t have health insurance.
As of 2020 (the 2019 tax year), the fee has effectively been abolished for the foreseeable future.
Just be aware: Some states impose their own individual mandates, so if you’re an uninsured resident of Massachusetts, New Jersey, Vermont, California, Rhode Island or Washington, D.C., you may still have to pony up a fee if you don’t have health insurance.
2. Higher medical expense deductions
In 2018, you could deduct medical expenses above 7.5% of your adjusted gross income. In 2019, that amount is now raised to 10 percent – again.
To backtrack a bit, the Tax Cuts and Jobs Act had previously lowered the threshold from 10% to 7.5%. This meant you could only deduct medical expenses if they were at least 7.5% of your annual earnings. For example, if you earned $50,000 a year, you could deduct medical expenses that totaled at least $3,750 per tax year.
However, that threshold has now been raised back to 10%. So, if you earn $50,000, your non-insured medical expenses must now be at least $5,000 in order to qualify for a deduction. This means you’ll have to spend $1,250 more per calendar year in medical expenses to get that deduction for the 2020 tax season (for taxes filed in 2019).
3. No more alimony deductions
Divorce can create a whole host of financial issues for one or both ex-spouses. In the past, when divorced people filed taxes, ex-spouses could claim deductions on their tax returns in certain instances. For example, spouses needing to pay alimony could claim a deduction, and the recipient of that alimony could claim the collected alimony as income.
That rule is changing starting in tax season 2020 due to the Tax Cuts and Jobs Act. And it works both ways. The ex-spouse who pays alimony can’t claim a deduction on their payments, and the one who receives the payments can’t claim it as income. Taxpayers should take this into account when they organize their finances this year and next.
4. Changes to HSA and retirement contribution limits
Sometimes, the money you may owe when filing your taxes isn’t always due to a penalty, late fee or a surcharge. Sometimes you discover what you could have done differently with your money throughout the course of the year.
Case in point: If you have high-deductible health insurance, you’re eligible to contribute money into a Health Savings Account (HSA) to help pay for qualifying medical expenses.
This tax year, the IRS raised HSA contribution limits, meaning you’re allowed to contribute more money into your HSA savings account. But, if you were unaware of this, your HSA account might not be reaching its fullest potential.
In 2019, HSA self-coverage contributions have increased by $50, from $3,450 to $3,500. For family coverage, it increased $100 – from $6,900 to $7,000.
On the retirement front, base contributions to IRAs (Roth and traditional) and 401(k)s increased from $5,500 to $6,000 and $18,500 to $19,000, respectively. Catch-up contributions (extra contributions for workers over 50) remain unchanged this filing season.
5. Higher standard deduction limits
With tax filing, you have two ways to list your tax deductions: standard and itemized.
The former is a fixed dollar amount you might claim on your tax return, making the process easier and more streamlined. The latter involves a list of individual, separate deductions. Itemized filing might take more time, but could save you more money in the long run.
If you go the standard tax deduction route when filing your taxes, the limits for 2019 have increased. From 2018 to 2019, single filer deductions have gone up from $12,000 to $12,200. If you’re filing jointly as a married couple, the amount has gone up to $24,400 from $24,000. If you’re married but filing separately, the amount has also risen to $12,200 from $12,000. And, if you’re head of household, the standard deduction is now $18,350 instead of the former $18,000.
Similar to the rise in health and retirement contributions, higher standard deductions mean you’re allowed to deduct more on your taxes this year. So, take advantage of the savings while the opportunity exists.
Putting Your Tax Savings to Good Use
Just think: You may be able to save more money when filing your taxes. What will you do with all this new-found money?
Perhaps you can put the extra cash to good use and open a Chime account. And, if you’re a Chime member, your money can grow each time you get paid with Chime’s Save When You Get Paid feature — the perfect way to get started on next year’s tax season.