To many people, the start of a new tax season means new expectations and goals to be met. It’s time to focus on what went wrong or right during the previous season and adjust accordingly. Perhaps you intend to spend less this year and save more for other projects. The recent IRS tax changes have seen various improvements such as the resurrection of form 1099 nec reforms, which has simplified the process of compensating nonemployees and clarified compensation confusion that has been around for over thirty years. Additionally, the IRS reforms have made various adjustments like in the health and retirement plans as well as in individual income tax. Here are how the tax changes may benefit you.
Higher Retirement Account Contribution
Courtesy of the IRS tax changes, you’ll be able to save more as compared to the year ended 2019. That could significantly increase your retirement account contribution. The tax changes increased the retirement contribution amount on 401 k from $500 up to $19,500. It consequently allows individuals of 50 years and above to make an extra contribution of $6500 catch up amount for their retirement contributions. Compared to the last season, the changes increased the contributions by a whopping $500.
Similarly, the IRS made an inflation adjustment on the individual earning bracket. For this season, the single tax filer’s standard deduction increased to $12,400, rising by a total of $200. And for the married couples with a joint account, the standard deduction rose by $400, hitting a total of $24,800. The household heads’ standard deduction increased by $300 total to $18,650 for the year 2020. The increased taxpayer contribution can help you save, especially if you’re 50 years and above. However, the changes based on the cost of living will not apply to your retirement account, and the changes apply to that particular year.
Increase Health Saving Account Contribution
As compared to last year, taxpayers can also increase their health savings. The health savings account allows you to save money before it is taxed and let it multiply with no tax attached. You can then use the funds to cover medical expenses on qualified health care categories. However, it is essential to note that the money in these accounts expires. For instance, if you contributed money in 2019, you cannot roll over the amount to 2020. But to some exceptions, some companies can allow you to push a maximum of $500 to the next period. Or, if you’re lucky enough, you can be given a grace period in the new season.
If your health coverage is for a single individual, your savings will increase from $3,500 in 2019, up to $3,550 in 2020. But if your health plan covers the whole family, then your savings will increase from $7,000 in 2019, up to $7,100 this year. There are also other vital accounts, such as dependent care, that may be available to you. This account is a bit different from the health care account, and it allows you to make up $5,000 pre-tax savings to cover for a child’s health care within that year. But you can always consult if it’s possible to roll over to the next year or the possibility of a grace period.
Increase the Income Limits for Roth IRAs
The 2020 tax changes have made the Roth IRAs even more attractive. Despite not requiring upfront payments, the Roth IRAs distributions are actually tax-free when you meet the set standards. The contributions directly come from your contributions and not from your taxable income; therefore, you can withdraw your contributions at any time without any tax charges or penalties. The Roth IRAs can be the best way to save, especially for the individuals who think their tax deductions may rise by the time they retire. It’s an easy way to free your money from tax deductions in the future because you’ll pay now for any amount going into your account.
However, the only drawback with this account is that people with higher incomes are limited to contribute directly. But due to the tax changes, these higher-earners may have a chance to contribute to the Roth IRAs because of the increased income thresholds. For instance, for single tax filers, the contributions start phasing when they earn up to $124,000, and then the contributions get barred once your earnings reach or exceed $139,000. For the married couples with joint accounts contributions don’t phase until their income hits $196,000, then the contributions get barred once the amount reaches or exceeds $206,000.
Whether it’s at a business or personal level, tax requirements can be overwhelming. Because they seem to work against the taxpayer’s expectations. However, when changes happen, no matter how small they seem to be, as long as they relieve some burden, you can take the advantage to save more. The highlighted updates can help you save more to better your situation.