Many of the annual limits and tax rates are adjusted for inflation each year. The IRS recently released the inflation adjustment amounts for 2020 amounts. Note that while some of the changes may seem immaterial, sometimes even small changes can save you thousands of dollars in taxes. We have summarized below some of the key changes for 2020.
One of the best examples where you need to pay close attention relates to anyone either currently on Medicare – or within 2 years of signing up for Medicare. This is because certain Medicare premiums are determined by your income. Medicare looks back 2 years and if your income exceeds certain thresholds, your premiums increase. The basic Medicare Part B monthly premium 2020 is $144.60. If your income exceeds the first threshold income tier limit by just $1.00, this could cost you an additional $1,700 in Medicare premiums! So, it’s important to understand and plan your income, where possible, each year.
Health Savings Accounts
The annual contributions limits are $3,550 for individuals and $7,100 for family coverage. If you are 55 or older you can contribute an additional $1,000. Contributions to HSA’s are tax deductible and also grow tax free as long as the funds are used for medical expenses.
Contribution Limits for Retirement Plans
The allowed contribution to 401(k) plans increases $19,500. You are also allowed a “catch-up” contribution of $6,500 if you are age 50 or older (so $26,000 total).
The contribution limit for defined contribution plans increases to $57,000. Participants in these plans age 50 or older can also add the additional contribution $6,500. If you are self-employed or own a small business, you need to understand these plans as the tax savings are significant.
Traditional IRAs and Roth IRA contributions remain unchanged at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and older.
The Standard Deduction (if you don’t itemize)
The standard deduction for married filing jointly increases to $24,800 for tax year 2020. For single taxpayers, the standard deduction rises to $12,400.
Estate Tax Exclusion and Gifting Limits
Estates of decedents who die during 2020 have an estate tax exclusion amount of $11,580,000. The annual exclusion for gifts remains unchanged at $15,000.