The most common tax problems for 2020
We’re roughly halfway through 2019, which means the 2020 tax season will soon be upon us. But rather than wait until next March or April to think about their tax returns, taxpayers — and their advisors — should proactively consider some of the challenges that they could face.
While it’s been more than a year since the Tax Cuts and Jobs Act went into full effect, many Americans are still relatively uncertain of how these changes impact them. The 2020 tax season could be the season that we see old problems resurface and a set of new issues emerge.
Here are some of the common tax problems of 2020 that we should all be aware of.
1. 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 (fiscal year 2019), there’s no longer a federal penalty. However — and this is where the confusion exists — 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 401(k) base contribution is up to $19,000 (it was $18,500 in 2018);
- The 401(k) catch-up contribution remains unchanged at $6,000;
- The IRA base contribution (whether Roth or traditional) is up to $6,000 (it was $5,500 in 2018); and,
- The IRA catch-up contribution remains unchanged at $1,000.
While these may not seem like major increases, they’re important. The $500 increase in IRA contribution limits is especially noteworthy, as these limits hadn’t budged since 2013.