Some Items to Consider for 2020
We’re more than halfway through 2019, which means the 2020 tax season will be here soon. But rather than wait until next March or April to think about their tax returns, taxpayers should proactively consider some of the challenges that they could face.
Here are some items to consider for 2020 that we should all be aware of.
- The individual mandate penalty
Almost all of the Tax Code changes stemming from the Tax Cuts and Jobs Act went into effect during 2018. However, a few didn’t become active until this year. The change to the shared responsibility payment is one of these.
The shared responsibility payment, which is commonly referred to as the individual mandate penalty, was previously introduced under the Affordable Care Act. It essentially required people to have some form of health insurance (Obamacare, private or otherwise). If a taxpayer couldn’t prove they had health insurance, they owed a penalty with their taxes.
Starting with the 2020 tax season (for year 2019), there’s no longer a federal penalty. However, there are still some state-based penalties. For example, New Jersey, Massachusetts and Washington, D.C., all still have some form of penalty in place. Taxpayers will need to be cautious in this regard and do their research.
- The medical expense deduction threshold
Then came the Tax Cuts and Jobs Act, which brought the threshold back down to 7.5 percent in 2017 and 2018. Unfortunately, it’s returning to 10 percent this year.
What does all of this mean? Basically, if a taxpayer plans on itemizing in 2019, their unreimbursed medical and dental expenses need to exceed 10 percent of their adjusted gross income in order to qualify as a deduction.
- Confusion over alimony deduction
The elimination of the alimony deduction is another one of the Tax Cuts and Jobs Act changes that starts this year. This means that alimony payments tied to any divorce or separation agreement that’s made this year or thereafter will not be deductible. For some taxpayers, this is a pretty significant change that could cost thousands of dollars.
- Failure to report all income
Reporting income used to be a pretty straightforward process. Most people were either W-2 employees or self-employed with one or two 1099s. But as the gig economy has expanded, more and more taxpayers have three, four or five different streams of taxable income that nobody else is reporting. Expect to see less-organized taxpayers fail to report all of their income in 2020. Some of this will go undetected, while others will get slapped with penalties.
- No quarterly estimated taxes
With more freelancers than ever before, this also means more taxpayers will be required to pay quarterly estimated taxes for the 2019 tax year. Unfortunately, some people are not aware they have to do this, or don’t know how and when to make their payments.
A failure to pay quarterly estimated taxes does a couple of things. First, it leaves the taxpayer with a massive tax bill come April. Second, it can actually trigger late fees and interest on top of the base tax figure. For high earners, this could amount to thousands of dollars in additional taxes.
- Underpaying estimated tax payments
Making quarterly estimated tax payments on time is only half the battle. For inexperienced freelancers, underestimating the amount of taxes they owe is another huge problem.
As the name suggests, quarterly tax payments are estimates of what a taxpayer thinks they’ll earn over the course of a given year. In order to accurately estimate their tax burden, they must keep meticulous records and run calculations to generate a ballpark estimate. It’s OK if they slightly underpay, but it’s much better if they slightly overpay. This ensures they end up getting a small amount of money back in April (as opposed to forking over even more money).
- Failure to file on time
Finally, there’s the problem of not filing taxes on time. For most people, this seems like a pretty black-and-white issue, but 20 percent of people continue to file their taxes late. As a result, they face penalties, fees and other inconveniences. Expect this problem to continue in 2020.