We are 113 days until 2020. If you’re wondering where 2019 went, we are right there with you. As the 2018 tax extension deadline approaches on October 15, 2019, we know you are most likely not considering filing your 2019 tax return yet. But maybe we all should be. With many new updates to tax laws and the final implementation to steps of the Tax Cuts and Jobs Act, it is easy to be unsure of how these changes are going to affect you. We are here to walk you through some anticipated challenges for the 2020 tax season.
Challenge 1: Failing to File Taxes on Time
Did you know that 20% of Americans file taxes late? While it may be a no brainer to get your taxes filed on time, it still remains a daunting task to many – especially those with multiple revenue streams, business owners, or freelancers. Even with online formats for filing, YouTube videos on how-to-file, and more, late filers face fees, penalties, and associated inconveniences with filing beyond the due date. This is not seeing a shift for the 2020 filing year. One way to ensure that you are not going to face penalties for late filing is to make sure you file an extension on your federal tax return. This gives you extra time to ensure that your receipts, income, and taxable deductions are in order. Keep in mind, filing an extension does not mean you also do not need to pay tax owed by the deadline. You will want to send in a tax payment with your extension if you expect to owe tax in order to avoid penalties.
Challenge 2: Health Savings Accounts and Medical Deduction Thresholds
For the 2020 filing year, individuals and families with high-deductible policies that opt for Health Savings Accounts (HSA) can expect changes. As a self-only applicant, the maximum that you can contribute to your account will now be $3,500 (up from $3,450 in 2018) and as a family, the amount is $7,000 (up from $6,900 in 2018). This change is somewhat small, but notable as the tax season is already underway. Those opting for HSAs can realize the tax advantage of contributions made to these accounts are pre-tax/tax-deductible, meaning the contributions are made prior to the contributed income being taxed.
Along with this change in healthcare comes the threshold for medical and dental deductions. With the 2010 Affordable Care Act, the number raised from 7.5 % to 10% of adjusted gross income, making it difficult for people to qualify for deductions. Then, the threshold went back to 7.5%. Now, it is returning to 10%. This means that in 2019, itemized medical and dental expenses will need to exceed 10% of adjusted gross income in order to qualify as a deduction.
Challenge 3: Individual Mandate Penalty
Most of the changes to the 2020 tax season have come from the Tax Cuts and Jobs Act. Although the majority of this act went into effect in 2018, some of the changes did not become active until this year. One of those changes is the shared responsibility payment, which is often referred to as the individual mandate penalty and was originally introduced under the Affordable Care Act of 2010. This act required every person to have some form of medical insurance whether it be private, coverage through ACA, or another alternative. Within this act, if an individual could not prove they had health coverage, they were fined a penalty which was included within their taxes. This changes in 2020, fiscal year 2019. There is no longer an individual mandate penalty for lack of medical insurance. However, this change is not consistent across the United States. Several states will still have some form of the penalty in place – such as in New Jersey, Massachusetts, and Washington D.C. Taxpayers will have to research to see if they will be affected by this penalty or not, when preparing their taxes for 2020.
Challenge 4: Alimony Modifications for 2020 Tax Filing
Alimony payments tied to any divorce or separation agreement will no longer be tax deductible from this filing year forward. This is another one of the Tax Cuts and Jobs Act changes that begins this year. This can mean a big change for someone who has been paying alimony regularly, as it could result in a loss of thousands of dollars. If this clause affects you and you have not already, be sure to start preparing early for this large challenge for the 2020 filing season.
Challenge 5: Penalties Associated with Failing to Report All Income
Beginning in 2020, expect to see penalties coming forth for taxpayers who do not report all or part of their income. As our economy shifts into more and more independent contractors, who carry several 1099s, the IRS is paying closer attention. While reporting income used to be easy with W-2s or one or two 1099s, the growth of freelancing means a more complicated tax reporting process. If you fall into the independent contractor category, be sure to consider utilizing an accountant early on in order to adequately report income, track deductions, and save for taxes that may need to be paid.
Along with this is also underpaying estimated tax payments as a freelancer. Working as a freelancer, it can be common to forget quarterly tax payment deadlines, and along with this can be a lack of understanding for how much to set aside to pay taxes. Quarterly payments are an estimate of what a taxpayer assumes he or she will earn annually. These payments keep the taxpayer in check so that at the end of the fiscal year they do not miscalculate and end up owing a huge amount. It is recommended that each taxpayer set aside between 22-25% of every payment into a savings account so that money is available for paying taxes at the end of each fiscal year. Failing to pay quarterly taxes leaves the taxpayer with a tax bill that can be very large when April rolls around, as well as adding hefty late fees and interest on top of the existing penalty fee. For those who earn a lot of money, this could in turn mean a lot of taxes due. If you are unsure of how to pay taxes as a freelancer, the IRS has help. This resource can help you understand how to make tax payments, who is required to pay, and how these payments impact the overall return. Those who are self-employed, as well as freelancers, are encouraged to read this document to ensure all kinks are worked out for the 2020 tax season.
Tennessee, Georgia, and Wyoming CPA Firm Prepared for 2020 Filing Season
With offices in three locations nationwide, you don’t have to travel far to find an accountant that is already prepared for the challenges that the 2020 filing season will face. At Lawhorn CPA Group, we make tax filing comprehensible and provide you with the assistance you need. Reach out today with any questions, filing concerns, or to learn more about the changes for 2020.