IRS releases updates for 2020; here’s what you need to know

thanksforbuying - stock.adobe.com

Now that we are in a new year, are there any changes I should account for when planning out 2020?

The beginning of the year is always a good time to take stock of what you accomplished in the previous year and start planning for how you will accomplish your goals in the new one. The IRS released some important updates you should be aware of so you can plan accordingly.

Tax brackets. Each year, the IRS adjusts the tax brackets to account for inflation. I recommend checking the new brackets to verify your federal income tax rate for the new year.

Standard deduction. The standard deduction increased to $12,400 from $12,200 for single filers. For married couples, the standard deduction increased from $24,400 to $24,800.

Also by Jeff Witz, CFP: Self-employed? Here’s how you can save for retirement

Workplace retirement plan contributions. Contribution limits increased for 401(k)s, 403(b)s, and most 457 plans to $19,500, up from $19,000 in 2019. If you are over age 50, the catch-up contribution amount increased to $6,500, up from $6,000. The maximum combined employer and employee contribution amount increased to $57,000 from $56,000 for persons under age 50. For those over 50, the maximum increased to $63,500 from $62,000. The employee compensation limit for calculating contributions increased to $285,000 from $280,000.

Traditional and Roth IRAs. There was no change to the annual contribution limits for traditional and Roth IRAs. That amount remains $6,000 if under age 50 and $7,000 if over age 50.

Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension IRAs. The contribution limit for SIMPLE IRAs increased to $13,500 from $13,000. The SIMPLE catch-up contribution limit for those over age 50 remains at $3,000. The SEP maximum compensation limit increased to $285,000 from $280,000.

Health savings accounts (HSAs). If you are in a high-deductible health plan, you may have access to an HSA. If you are the only person covered by your health plan, the HSA contribution limit was increased to $3,550 from $3,500. If family members are also on the plan, the contribution limit was increased to $7,100 from $7,000.

Flexible spending accounts (FSAs). The health care FSA contribution limit was increased to $2,750 from $2,700.

Lifetime gift and estate tax exemption. This exemption amount was increased to $11.58 million per individual, up from $11.40 million. For married couples, the exemption amount is $23.16 million.

Next: Annual gift exclusion, child tax credit

Annual gift exclusion. This amount remains unchanged at $15,000.

Child tax credit. This credit has been increased to $2,000 and is refundable up to $1,400. However, the adjusted gross income phaseout to claim this credit remained the same at $400,000 of income for married couples filing jointly.

Student loan interest deduction. The deductible amount remained at $2,500. However, this deduction is phased out for married couples filing jointly having between $70,000 and $140,000 of modified adjusted gross income. Single tax filers with annual income of $85,000 or more are completely phased out.

There are many other small changes that go into effect this year. We recommend you speak with your CPA or financial professional to get a comprehensive list.

What is the newly passed Secure Act and how might it impact me?

If you are not yet retired, the Secure Act will have little impact on your retirement planning strategies. However, if you are in or approaching retirement, it may impact you in the following ways:

• The age you must start taking required minimum distributions (RMDs) has been increased to 72. Previously, you had to start taking distributions from traditional IRAs and employer-sponsored retirement plans starting at age 70½. Roth IRAs are exempt from RMDs.

Read - Inherited retirement accounts: What are your options?

• There may be more opportunities to complete Roth conversions. A Roth conversion is when you convert pre-tax assets in a traditional IRA to Roth assets and pay the income tax in the year the conversion takes place. This is typically advised when you have a low-income year in retirement and will be in a lower tax bracket. Once the assets have been converted to a Roth, they are no longer subject to RMD rules and can continue to grow tax free until you are ready to take the money from the account.

• The rules changed for inherited or “stretch” IRAs. Previously, if you inherited a retirement account from a non-spouse (parent, grandparent, etc.), you could stretch out the distributions based on your life expectancy. This could have significant tax benefits. Under the Secure Act, you are no longer able to stretch the required distributions. The entire account must be distributed within 10 years of the year the IRA owner died.

The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.