8 Ways 2019 Tax Returns Will Change in 2020 Filing Season

Want to know what's in store for 2019 tax returns in the upcoming 2020 filing season? Below is a rundown of the 8 biggest changes that may affect how much you'll owe Uncle Sam on tax day:

Top 2019 Tax Return Changes

1. Tax Rate Changes

There are currently seven federal tax brackets for 2019, ranging from 10% to 37%. While these tax rates themselves haven't changed from 2018, the income amounts in each of the brackets are adjusted each year for inflation. Below is a table listing the tax brackets and rates for the 2019 tax year:

Rate

 For Unmarried Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over For Heads of Households, Taxable Income Over
10% $0 $0 $0
12% $9,700 $19,400 $13,850
22% $39,475 $78,950 $52,850
24% $84,200 $168,400 $84,200
32% $160,725 $321,450 $160,700
35% $204,100 $408,200 $204,100
37% $510,300 $612,350 $510,300.00

2. Increased Standard Deduction

As in previous years, for the 2020 filing season, standard deduction amounts will also increase. The higher deduction limits for 2019 tax returns are as follows:

 

Filing Status

Standard Deduction Amount
Single & Married Filing Separate (MFS) $12,200
Head of Household $18,350
Married Filing Joint (MFJ) $24,400

3. New Form 1040-SR Tax Return for Senior Citizens

Included in the passage of the Budget Act of 2018, is a provision that gives senior citizens (those aged 65 and older) their own tax return form, best described as a simplified version of the 1040-EZ. Until now, most seniors had to complete the more complicated form 1040, because they couldn’t meet the income requirements for filing form 1040-EZ. The new 1040-SR form allows senior citizens to claim the standard deduction or itemize their deductions on Schedule A. There are also no income limits or restrictions on the types of income that can be reported

The 1040-SR form is also formatted with seniors in mind. It has larger text and a better color contrast so it is easier on the eyes when reading.

4. Increased 401k and 403(b) Contribution Limits

For 2019 tax returns, the 401K retirement account and 403(b) Tax-Sheltered Annuity contribution limits have been raised to $19,000. Those age 50 or older can contribute an additional $6,000 "catch-up" contribution. These higher limits mean a corresponding decrease in taxable income.

5. Increased IRA Contribution Limits

IRA contribution limits have also increased to $6,000. Those age 50 or older can contribute an additional $1,000 catch-up contribution.

6. Increased AMT Exemptions

The Alternative Minimum Tax ensures that certain wealthy taxpayers, estates, and trusts are paying no less than a minimum amount of tax on their income. The AMT estimates income tax after adding certain tax preference items back into adjusted gross income. The Alternative Minimum Tax (AMT) exemption amounts have been increased for inflation for 2019. The new amounts for the 2020 filing season are as follows:

 

Filing Status

Exemption Amount

Single

$71,700

Married Filing Joint (MFJ)

$111,700

Married Filing Separate (MFS)

$55,850

Trusts & Estates

$25,000

 

7. Increased HSA Contribution Limits

Tax payers with a Health Savings Account (HSA), can now increase contributions to their health care savings so they can accrue interest tax free. In 2019 tax returns, the individual limit has been raised to $3,500, while the family accounts now have a limit of $7,000.

8. New Supplemental Schedules from Six to Three

In 2018, the IRS created six new supplemental schedules that would be used together with form 1040. For 2019 tax returns, those schedules have been redesigned and combined into three larger schedules-- he goal being to streamline the filing process. Drafts of these redesigned schedules can be viewed on the IRS website:

What You Need to Know About the New W-4 Tax Form for 2020

The W-4 tax form is getting a new look in 2020, and it promises to make the whole business of tax withholding much more accurate and much less confusing-- for both employers and their employees. So, if you will be starting a new job in 2020 or need to update your tax withholding status, then here are a few things you should know about the new W-4.

Why is the W-4 Form Changing?

The W-4 tax form, also known as the Employee’s Withholding Allowance Certificate, tells your employer how much federal income tax to withhold from your wages each payment cycle. Until recently, the value of this withholding allowance was linked to the amount of exemptions you claimed. The Internal Revenue Service (IRS) offered two types of exemptions: one personal and the other for dependent children under the age of 18.

Earlier this year, the IRS announced updates to the W-4 tax form since tax exemptions were eliminated with the passage of the 2017 Tax Cuts and Jobs Act. Under the new legislation, you can no longer claim personal exemptions or dependency exemptions. In it's place, standard deduction amounts have nearly doubled for tax years 2018 through 2025.

What is Different in the Updated W-4 Tax Form?

In addition to accounting or changes to tax legislation, the W-4 redesign is also supposed to make the form simpler and easier to complete for employees and ultimately help them to provide more accurate information. In fact, with the old form many employees avoided updating their withholding allowance altogether due to the complicated worksheets they had to work through.

If you are one of these people, then the W-4 will be a breath of fresh air. With the redesign, the confusing worksheet has been eliminated and is replaced with a simple 5-step process as well as a series straightforward questions.

Steps 2 to 4 is where all the changes are. Step 2 is meant for taxpayers working more than one job or who are filing jointly with a spouse who is also working. You only need to complete this step and the following two steps if they apply to you.

In Step 3, you can claim dependent children and other dependents out of your withholding. Step 4 allows you to make other adjustments to your withholding allowance, like having tax withheld for other sources of income.

What Do You Need to Do About the New W-4 Form?

Starting in 2020, if you need to complete a W-4, whether it’s for a change in employment, to account for a life change such as marriage or the birth of a child, or to adjust your withholding amount, you will need to use the updated version. If none of the above applies to you and you already have a W-4 on file with your current employer, then you are not required to fill it in again.

Since form W-4 tells your employer how much federal income tax to withhold from your wages, accurately completing a W-4 form can help ensure you have the right amount of federal income tax deducted throughout the year. This is important because having too little tax withheld from your wages, could mean you end up owing Uncle Sam at the end of the tax year, while withholding too much means you essentially give the US government an interest-free loan for a year.

To help ease the transition to the new W-4 and the changes to the tax legislation that are behind it, the IRS put out several early draft versions of the W-4 form, as well as a FAQs page about the revisions.

There is also a handy Tax Withholding Estimator. This online app walks you through the process of estimating your withholdings and helps you to estimate your upcoming tax refund or obligation based on your current withholdings. You can also get guidance on what you can do to change outcome of your federal income tax return-- i.e either get a refund, end up even, or owe the government come tax day. The app will additionally help you to navigate more complex tax situations, such as what to do with seasonal employment, self-employment income, and income from investments.

Final Safe Harbor Rules for Rental Real Estate Activities

In January 2019, the IRS issued Notice 2019-07 which contains a proposed revenue procedure safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of IRC section 199A. The IRS recently issued Revenue Procedure 2019-38 which contains the final rules for this safe harbor.

IRC section 199A provides for a deduction to non-corporate taxpayers of up to 20% of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20% of aggregate real estate investment trust dividends and qualified publicly traded partnership income. The regulations for IRC section 199A state that a trade or business for purposes of the deduction is generally a trade or business under IRC section 162 other than the trade or business of performing services as an employee. In addition, the regulations state that rental or licensing of tangible or intangible property (rental activity) that does not rise to the level of a section 162 trade or business is nevertheless treated as a trade or business for purposes of IRC section 199A, if the property is rented or licensed to a trade or business conducted by the individual or a relevant pass-through entity which is commonly controlled.

Author's Comment

In other words, an individual does not have to report the rental activity on a Schedule C as a sole proprietorship to claim the deduction. Rental real estate activities reported on a Schedule E may also qualify as a trade or business for purposes of the deduction, but only if there is a certain level of services provided in relation to the Schedule E rental activity.

To help mitigate the uncertainty of whether or not a rental real estate activity rises to the level of a trade or business for purposes of IRC section 199A, Revenue Procedure 2019-38 provides the final rules for the safe harbor that was originally proposed in Notice 2019-07. If the safe harbor requirements are met, the rental real estate enterprise will be treated as a single trade or business for purposes of applying the regulations under IRC section 199A, including the application of the aggregation rules. Partnerships and S corporations may also use this safe harbor. Failure to satisfy all of the requirements of the safe harbor does not preclude a taxpayer or the IRS from otherwise establishing that the rental real estate activity is a trade or business for purposes of IRC section 199A.

Safe harbor. The determination to use this safe harbor must be made annually. Each rental real estate enterprise will be treated as a single trade or business if all of the following requirements are satisfied during the tax year:

A) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise. If a rental real estate enterprise contains more than one property, income and expense information statements for each property must be maintained and then consolidated.

B) For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise. For rental real estate enterprises that have been in existence for at least four years, in any three of the five consecutive tax years that ends with the current tax year, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise.

C) The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following:

  1. Hours of all services performed,
  2. Description of all services performed,
  3. Dates on which such services were performed, and
  4. Who performed the services.

If services with respect to the rental real estate enterprise are performed by employees or independent contractors, the taxpayer may provide a description of the rental services performed by such employee or independent contractor, the amount of time such employee or independent contractor generally spends performing such services for the enterprise, and time, wage, or payment records for such employee or independent contractor

D) A statement is attached to a timely filed original return (or an amended return for the 2018 tax year only) for each tax year in which the taxpayer relies on this safe harbor. A single statement may be submitted, but the statement must list the required information separately for each rental real estate enterprise. The statement must include the following information:

  1. A description (including the address and rental category) of all rental real estate properties that are included in each rental real estate enterprise,
  2. A description (including the address and rental category) of rental real estate properties acquired and disposed of during the tax year, and
  3. A representation that the requirements of this revenue procedure have been satisfied.

Multiple properties. Taxpayers may either treat each interest in real estate properties as separate rental real estate enterprises, or treat each interest in similar properties as a single rental real estate enterprise. Similar real estate properties for purposes of combining properties into a single rental real estate enterprise means they are either all residential or commercial. Thus, commercial real estate held for the production of rents may only be part of the same enterprise with other commercial real estate, and residential properties may only be part of the same enterprise with other residential properties. Once multiple properties are combined into one enterprise, the taxpayer must continue to treat each property as a single rental real estate enterprise when using this safe harbor. However, if properties are each treated as separate enterprises for the current year, the taxpayer may choose to treat each similar property as a single rental real estate enterprise in a future year

Rental services. For purposes of the safe harbor, rental services include, but are not limited to:

  1. Advertising to rent or lease the real estate,
  2. Negotiating and executing leases,
  3. Verifying information contained in prospective tenant applications, iv) Collection of rent,
  4. Daily operation, maintenance, and repair of the property, including the purchase of materials and supplies,
  5. Management of the real estate,
  6. Supervision of employees and independent contractors

Rental services may be performed by owners, including owners of partnerships and S corporation, or by employees, agents, and/or independent contractors of the owners. The term rental services does not include financial or investment management activities, such as arranging financing, procuring property, studying and reviewing financial statements or reports on operations, improving property, or hours spent traveling to and from the real estate.

Certain rental real estate arrangements excluded. The following types of property may not be included in a rental real estate enterprise for purposes of this safe harbor:

  1. Real estate used by the taxpayer as a personal residence,
  2. Real estate rented or leased under a triple net lease. A triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to pay for maintenance activities for property in addition to rent and utilities,
  3. Real estate rented to a trade or business conducted by a taxpayer (including a partnership or S corporation) which is commonly controlled under Regulation section 1.199A-4(b)(1)(i).
  4. The entire rental real estate interest if any portion of the interest is treated as a specified service trade or business (SSTB). See Regulation section 1.199A-5(c)(2) for special rules where property or services are provided to an SSTB.

Note: Article courtesy of Tax Materials, Inc, Minnetonka, MN

Social Security COLA Increase: 2018 to 2020

The Social Security Administration has announced that Social Security and Supplemental Security Income (SSI) benefits will increase by 1.6% for 2020. The chart below identifies key figures that are affected by the annual Cost-of-Living Adjustment (COLA) for the years 2018 through 2020.

Social Security and Medicare Highlights
  2020 2019 2018
Social Security Benefits (COLA) increase 1.60% 2.80% 2.00%
Maximum earnings subject to:      
Social Security tax $137,700.00 $132,900.00 $128,400.00
Medicare tax No Limit No Limit No Limit
Maximum Social Security tax      
Employee $8,537.40 $8,239.80 $7,960.80
Self-employed $17,074.80 $16,479.60 $15,921.60
Maximum Medicare Tax No limit No limit No limit
Social Security tax rate      
Employee 6.20% 6.20% 6.20%
Self-employed 12.40% 12.40% 12.40%
Medicare tax rate5      
Employee 1.45% 1.45% 1.45%
Self-employed 2.90% 2.90% 2.90%
Earnings needed for one quarter of coverage $1,410.00 $1,360.00 $1,320.00
Maximum earnings and still receive full Social Security benefits      
Under full retirement age1 $18,240.00 $17,640.00 $17,040.00
Year of full retirement age2 $48,600.00 $46,920.00 $45,360.00
Full retirement age3 No Limit No Limit No Limit
Maximum Social Security monthly benefits at full retirement age.      
Medicare premiums4      
Part A (per month)   $437.00 $422.00
Part B (per month)   $135.50 $134.00
Hospital deductible   $1,364.00 $1,340.00
1 $1 in benefits is withheld for every $2 in earnings above limit.
2 Applies only to earnings for months prior to attaining full retirement age. $1 in benefits is withheld for every $3 in earnings above the limit.
3 A person born in either 1952, 1953, or 1954 will reach full retirement age in 2018, 2019, or 2020 at age 66.		 4 The Department of Health and Human Services has not yet announced Medicare premium changes for 2020. Standard monthly premiums are listed for 2018 and 2019. High income taxpayers may be subject to higher premiums.
5 Medicare tax rate increases by 0.9% on wages and SE income above the threshold amount, plus 3.8% on unearned income above the threshold amount.

 

Note: Article courtesy of Tax Materials, Inc, Minnetonka, MN

What Are the Biggest Tax Changes in the Tax Cuts and Jobs Act of 2017?

The new tax law, commonly called the “Tax Cuts and Jobs Act,” is the biggest federal tax law change in over 30 years. Below are some significant changes affecting individuals and businesses. Note: Except where noted, the changes are effective for tax years beginning after December 31, 2017.

Individuals

Tax provisions that were eliminated:

  • Personal exemption deductions are suspended.
  • Phase-out of itemized deductions based on adjusted gross income (AGI) is suspended.
  • Itemized deduction for home equity interest (other than acquisition debt) is no longer allowed.
  • Itemized deduction for miscellaneous itemized deductions subject to the 2% floor are no longer allowed. Examples include investment expenses, unreimbursed employee business expenses, and tax preparation fees.
  • Personal casualty loss and theft deductions are eliminated unless the loss is incurred in a federally declared disaster area.
  • The moving expense deduction and income exclusion is allowed only to members of the Armed Forces (or their spouses or dependents).
  • No charitable contribution deduction is allowed for a payment to a higher educational institution in exchange for the right to purchase tickets or seating at an athletic event.
  • Alimony is not deductible by the payer nor includible in income by the recipient for agreements entered into after December 31, 2018.
  • Effective for 2019, the shared responsibility payment under the Affordable Care Act for not having minimum essential health insurance coverage is zero.

Tax provisions that were reduced:

  • The 2018 individual income tax brackets are:

Single MFJ or QW
$0 to $9,525……………………… 10%
$9,526 to $38,700………………. 12%
$38,701 to $82,500……………… 22%
$82,501 to $157,500……………. 24%
$157,501 to $200,000………….. 32%
$200,001 to $500,000………….. 35%
$500,001 and over…………….. 37%		 $0 to $19,050…………………….. 10%
$19,051 to $77,400……………… 12%
$77,401 to $165,000……………. 22%
$165,001 to $315,000………….. 24%
$315,001 to $400,000………….. 32%
$400,001 to $600,000………….. 35%
$600,001 and over…………….. 37%
HOH MFS
$0 to $13,600…………………….. 10%
$13,601 to $51,800……………… 12%
$51,801 to $82,500……………… 22%
$82,501 to $157,500……………. 24%
$157,501 to $200,000………….. 32%
$200,001 to $500,000………….. 35%
$500,001 and over…………….. 37%		 $0 to $9,525……………………… 10%
$9,526 to $38,700………………. 12%
$38,701 to $82,500……………… 22%
$82,501 to $157,500……………. 24%
$157,501 to $200,000………….. 32%
$200,001 to $300,000………….. 35%
$300,001 and over…………….. 37%

The 2018 estate and trust income tax brackets are:

$0 to $2,550……………… 10%
$2,551 to $9,150………… 24%		 $9,151 to $12,500……………. 35%
$12,501 and over…………….. 37%

  • The threshold for deducting medical expenses is 7.5% of AGI for all taxpayers for 2017 and 2018.
  • The home mortgage interest deduction debt limit is reduced to $750,000 ($375,000 MFS) with certain exceptions.
  • The itemized deduction for state and local taxes is limited to $10,000 ($5,000 MFS). (This limit includes both state and local income taxes and real property taxes.)

Tax provisions that were increased:

  • The 2018 standard deduction is:

Single or Married Filing Separate……………………………………. $12,000
Married Filing Joint or Qualified Widow(er)……………………… $24,000
Head of Household…………………………………………………………. $18,000

The following additional standard deduction applies for a taxpayer 65
or older or blind, per person, per event:

MFJ, QW, or MFS……………………………………………………………… $1,300
Single or HOH………………………………………………………………….. $1,600

  • The Child Tax Credit increased to $2,000 per qualifying child and the phase-out threshold increased.
  • There is a new Family Tax Credit of up to $500 for dependents who are not a qualifying child for purposes of the Child Tax Credit.
  • The 2018 alternative minimum tax (AMT) exemption and phase-out ranges are:

Exemption Amount Phase-Out Range
Single or HOH……. $70,300 Single or HOH……….. $500,000 to $781,200
MFJ or QW……….$109,400 MFJ or QW……….$1,000,000 to $1,437,600
MFS…………………. $54,700 MFS…………………….. $500,000 to $718,800

  • For the charitable contribution deduction, the percentage of AGI limitation for cash to public charities and certain other organizations increased from 50% to 60%.
  • The estate and gift tax exemption amount increased to $11,180,000.

Tax provisions that were changed:

  • The long-term capital gain and qualified dividend income maximum tax brackets no longer follow the tax brackets for regular income tax purposes. The 2018 breakpoints are:

Taxable Income Maximum Rate Taxable Income Maximum Rate
Single
$0 to $38,600……………………… 0%
$38,601 to $425,800…………… 15%
$425,801 and over……………. 20%		 MFJ or QW
$0 to $77,200……………………… 0%
$77,201 to $479,000…………… 15%
$479,001 and over……………. 20%
HOH
$0 to $51,700……………………… 0%
$51,701 to $452,400…………… 15%
$452,401 and over……………. 20%		 MFS
$0 to $38,600……………………… 0%
$38,601 to $239,500…………… 15%
$239,501 and over……………. 20%

Estates and Trusts
$0 to $2,600…………………………………………………………………………. 0%
$2,601 to $12,700………………………………………………………………… 15%
$12,701 and over………………………………………………………………… 20%

  • The parent’s rate is no longer used to calculate the kiddie tax. Instead, taxable income attributable to net unearned income is taxed at the estates and trusts tax rates for both ordinary income and net capital gains.

Businesses

Tax provisions that were eliminated:

  • There is no longer a separate tax rate for personal service corporation’s (PSCs).
  • The two-year carryback provision for net operating losses (NOLs) has been eliminated except for certain losses.
  • There is no meals and entertainment deduction for membership dues or activities generally considered to be entertainment, amusement or recreation.
  • AMT for C corporations has been repealed.

Tax provisions that were reduced:

  • All taxable income of a C corporation is taxed at a flat rate of 21%.

  • The 70% dividends received deduction is reduced to 50%. The 80% dividends received deduction is reduced to 65%.
  • The net operating loss deduction (NOL) is limited to 80% of taxable income.

Tax provisions that were increased:

  • An individual taxpayer generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. In the case of a partnership or S corporation, the deduction applies at the partner or shareholder level. The deduction is disallowed for specified service trades or businesses when taxable income exceeds the threshold amount.
  • Special (bonus) depreciation is increased to 100% of property acquired and placed in service after September 27, 2017, with a new phase-down schedule for years after 2022. The new law allows special depreciation for both new and used property.
  • The Section 179 deduction is increased to $1,000,000 andthe phase-out threshold amount increased to $2,500,000.
  • The new law expanded the definition of Section 179 property to include certain property used predominantly to furnish lodging.
  • The depreciation limitations for luxury automobiles have been increased.

 

Note: Article courtesy of Tax Materials, Inc, Minnetonka, MN