Around November of each year, the IRS releases their changes for the forward-looking year. These changes include, but are not limited to, the maximum deferrals for various retirement accounts, the cost of living adjustment for Social Security income, the maximum income considerations for retirement plans, inflation adjustments on income tax brackets as well as the inflation adjustment for the standard deduction, among other income based inflation adjustments.
Below are some of the notable items as well as tips to consider on how these changes may impact you.
Savings Thresholds
- Maximum 401(k) contributions for employees increased from $19,000 to $19,500. For those who will be age 50 or older in 2020, they are permitted to make a catch-up contribution of $6,500, which is an increase of $500 from last year.
TIP: reach out to your corporate benefits department and remind them to increase your contribution to the maximum amount for 2020. If you are going to be age 50 or older in 2020 then you can also participate in the catch-up contribution.
- Maximum contribution to Defined Contribution plans increased to $57,000 from $56,000; this is further increased for individuals age 50 or older in 2020 to $63,500 from $62,000.
TIP: This is going to impact business owners the most. If you are a business owner and aren’t taking advantage of an individual 401(K), or are contemplating the benefits of a broader 401(k) for your workforce then reach out to us to have a discussion on the appropriate solution for you.
- IRA and Roth IRA contribution limits were unchanged at $6,000 plus $1,000 as a catch-up contribution for individuals age 50 or older in 2020.
- Note – the income phaseouts for IRA and Roth IRA contributions changed. You can determine if you’ll be impacted by reviewing the IRS website: https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500
- Flexible Savings Account (FSA) cap increased to $2,750
TIP: As a reminder, FSAs are a use or lose it account. If you do not use the amount contributed by the end of the year then you forfeit the unused balance.
- Health Savings Account (HSA) cap for single filers increased to $3,550 and $7,100 for families. This is an increase of $50 and $100, respectively. The catch-up contribution of $1,000 is unchanged.
TIP: To complete the maximum contribution in any tax year then you must be covered under a high deductible health plan for the full calendar year.
Income Tax Changes in 2020
- While the tax rates are staying the same in 2020, the income thresholds for various brackets all participated in inflation adjustments as follows:
- The standard deduction for 2020 is as follows:
Note: Individuals over age 65 or blind receive an additional $1,300
Estate and Gift Taxes
- The lifetime gift and estate tax exemption will be $11.58 million per individual, up from $11.4 million in 2019.
- The annual gift exclusion, which is the amount you can give to any other person without it impacting your lifetime exemption, will stay unchanged at $15,000 for 2020.
The Tax Cut and Jobs Act of 2018 remains in effect through 2025. After 2025, many of the changes for individuals and couples revert back to the pre-TCJA rules. This includes, but is not limited to, removal of the $10,000 deduction cap on state and local taxes, the cap on the maximum mortgage for calculating deductible mortgage interest goes from $750,000 back to $1,000,000, deductibility of investment advisor expenses, and the inclusion of personal exemptions. The lifetime gift and estate tax exemption will also revert to its pre-TCJA level of $5.49 million per individual (indexed for inflation).
Year-end is a great time to take an inventory of where you are financially – do a tax projection for this calendar year, talk to your benefits department to ensure proper deductions are taking place as we turn into the New Year, and lay the planning foundation for the next year.
