Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension
Are you getting ready to file your federal income tax return? 2020 is the second tax filing season following the Tax Cuts and Jobs Act (TCJA). Last year, because of the TCJA, more than 25 million taxpayers switched to claiming the standard deduction, instead of itemizing deductions, on their 2018 tax returns. The share of tax returns with Schedule A forms for itemized deductions dropped to about 10% of taxpayers from about 30%.
More people took the standard deduction in 2018 because it exceeded the amount that they could itemize. The most commonly used itemized deductions are state and local taxes (commonly referred to as SALT and capped at $10,000), charitable donations, and mortgage interest. Large qualified, unreimbursed medical expenses in excess of 10% of adjusted gross income are another allowable itemized deduction.
About 1.6 million people who received tax refunds in 2018 owed the federal government money during the 2019 tax filing season. TCJA changes were confusing to many taxpayers and more than 20% did not withhold or estimate enough taxes in 2018. In 2019, the IRS subsequently relaxed the penalty for having enough tax withheld for 2018 taxes and lowered the threshold from 90% of tax owed to 85%.
Below are six small steps to take during the upcoming 2020 income tax season:
Become Familiar with 2019 Tax Form Changes - Federal tax bracket income ranges and standard deductions were indexed for inflation. The 2019 standard deduction was $12,200 for single filers and $24,400 for married couples filing jointly with an extra $1,300 for taxpayers age 65+. The penalty for not having health insurance went away but several states- New Jersey, Massachusetts, and the District of Columbia- have state penalties.
Check Your Tax Withholding for 2020 - The IRS introduced a new, more accurate, Tax Withholding Estimator calculator during the summer of 2019. The calculator is more accurate than the previous one and includes options for different tax filing status categories and income sources. To use the calculator effectively, estimate your 2020 income and the amount of itemized deductions, if applicable.
File a New W-4 Form - A draft of a redesigned W-4 federal income tax withholding form for 2020 was also announced in 2019. The 2020 form eliminates the term “withholding allowances” and, instead, includes a five-step process with steps 2 through 4 being optional. Eliminating allowances aligns with the suspension of personal exemptions from 2018 through 2025 due to the TCJA.
Check Out Form 1040-SR - A new tax form, 1040-SR, was unveiled by the IRS in 2019 and is available for filing 2019 taxes in 2020. It is a simplified version of the more complex 1040 form and has a larger font size than the standard 1040, better color contrast, and a prominent chart for calculating the standard deduction. Taxpayers who use the new form must be at least age 65 but not necessarily retired.
Review the New Supplemental Schedules - 2018 tax returns included six schedules that were supplemental to the 1040 form. For 2019 tax returns, the schedules were reconfigured and there are now only three supplemental schedules. Some of the items from the prior year forms were combined in an effort to simplify the tax filing process. Get familiar with the new schedules before filing your tax return.
Get Help When Needed - Sources of taxpayer assistance include Volunteer Income Tax Assistance (VITA) programs, non-profit agencies and legal clinics that provide tax assistance, IRS tax offices, the IRS Help Line (800-829-1040), the IRS Free File program, tax software, commercial tax preparation firms, certified public accountants (CPAs), and (for very complex tax returns) tax attorneys.