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 tax returns, here are top 5 common 2020 tax problems to consider:
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.
2. Changes to HSA contribution limits
In addition to increasing the amount of money taxpayers can contribute to qualifying retirement plans, health savings accounts are also getting a tiny boost this year. For those with high-deductible policies that qualify under HSA guidelines, the changes are as follows:
Again, these slight adjustments won’t make anyone rich, but they are worth noting and could cause some confusion come April 2020.
3 The medical expense deduction threshold
There’s been a lot of back and forth regarding the threshold for deductible medical and dental expenses over the past decade. In 2010, the Affordable Care Act raised the number from 7.5 percent to 10 percent of adjusted gross income. This made it a lot more difficult for people to qualify.
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.
4. 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.
5. 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).
While every taxpayer has different earnings and deductions, it’s a good rule of thumb for most taxpayers to set aside somewhere between 22 and 25 percent of every payment into a savings account that’s explicitly reserved for making payments throughout the year.
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.
2. Changes to HSA contribution limits
In addition to increasing the amount of money taxpayers can contribute to qualifying retirement plans, health savings accounts are also getting a tiny boost this year. For those with high-deductible policies that qualify under HSA guidelines, the changes are as follows:
- Self-only coverage: now $3,500 (up from $3,450 in 2018); and,
- Family coverage: now $7,000 (up from $6,900 in 2018).
Again, these slight adjustments won’t make anyone rich, but they are worth noting and could cause some confusion come April 2020.
3 The medical expense deduction threshold
There’s been a lot of back and forth regarding the threshold for deductible medical and dental expenses over the past decade. In 2010, the Affordable Care Act raised the number from 7.5 percent to 10 percent of adjusted gross income. This made it a lot more difficult for people to qualify.
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.
4. 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.
5. 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).
While every taxpayer has different earnings and deductions, it’s a good rule of thumb for most taxpayers to set aside somewhere between 22 and 25 percent of every payment into a savings account that’s explicitly reserved for making payments throughout the year.
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