The world of taxes is always shifting, so make sure you’re informed about tax changes and updates for 2020. Most people want to carry out their civic duty by paying their taxes, but it can be tricky to stay on top of all the latest regulations — especially if you’re a US immigrant unfamiliar with local laws.
Here’s everything you need to know about taxes in 2020. We’ll cover:
- Tax refunds
- The new W-4 tax form
- The Tax Cuts and Jobs Act
- Other state laws
IMPORTANT NOTICE: Due to Covid-19, the federal government has extended the tax filing deadline to July, 15.
Changes in Tax refunds for 2020
One of the perks of filing taxes is receiving your annual tax refund — who doesn’t like free money? Unfortunately, that’s not exactly how things work.
Recent tax updates have changed how refunds work, confusing many taxpayers. Let’s clear up misconceptions about how tax refunds work, examine the changes, and look at how to avoid delays in receiving your refund.
How tax refunds work
A survey of 1,000 taxpayers found around half of the respondents believed the government hands out free money out of the kindness of its heart. The other half realize they’ve already paid the money the government refunds them — make sure you’re in this group.
The government gives out refunds to people who make excessive tax payments — it’s a problem we can overcome if the correct amount of tax is withheld, which would give us more money in each paycheck.
Yet more than half of taxpayers said they prefer receiving a refund to paying less tax throughout the year. This is probably because most people enjoy receiving a large lump sum more than tiny increases in their pay throughout the year.
Last year, the average refund was $2,725 — a considerable sum for most people and the largest check of the year for 44% of survey respondents.This large amount seems more appealing than 24 bi-monthly payments of $113.
Using tax refund money
As a result, refunds give their recipients a chance to catch up on debts or even pay for a vacation. Some economists see these refunds as a kind of forced saving.
Luckily, most taxpayers make good use of the extra money — just over 50% of respondents plan to use it to increase their emergency savings. However, since the IRS doesn’t pay interest on these “forced savings,” it’s not a very efficient way to save. In contrast, some high-yield savings accounts offer an annual interest rate 2% while providing easy access during emergencies.
For taxpayers who live on a low budget and are dependent on each paycheck, receiving bi-monthly payments instead of one large tax refund would provide more relief.
If you think you’re overpaying, you can check using the IRS tax withholding estimator. It’s then possible to modify your tax withholdings by reviewing your W-4 form with the support of your employer (more on this later).
However, the IRS doesn’t recommend making withholding changes in December as it’s too close to the end of the fiscal year. January is a better time to check.
Tax refund delays
The IRS says it usually takes 21 days to receive a refund, but there are several reasons you could experience delays. The most common culprit is making errors in your tax return, so you should take extra care to ensure everything is correct.
Another reason for receiving your tax refund late is problems with the bank that handles your deposits. If you apply to receive refunds by mail, it’s even more likely you’ll experience an issue.
Although experiencing a delay is sometimes out of your control, you can proofread your tax return multiple times and send it as early as possible to improve your chances of receiving a timely refund.
You should also remember that anyone who claims Earned Income Tax Credits (EITC) or Additional Child Credits (ACTC) before mid-February will receive their tax refund later.
Laws require full retention of the refunds at first, even the portion of the refund not associated with the credits. But don’t worry — you’ll still receive the money eventually.
The new W-4 form for taxes
The Tax Cut and Jobs Act (TCJA) of 2017 reduced tax rates, doubled standard deductions, and increased child credits. Because of the lower overall tax bill, there was confusion over the correct amount that should be withheld.
Faced with this problem, the IRS reviewed the process employers use to withhold taxes from their employees’ paychecks. It released new W-4 form for use from 2020.
Workers can now determine the proper withholding amount depending on their salary and fill out a certificate for their employer. Most employees don’t need to submit a new form to their employer unless they’re starting a new job or want to make an adjustment.
How to fill in the form
The W-4 form is very easy to fill in — just add your name, address, SSN, and marital status.
If you have more than one job or your spouse works, this could affect the amount of withholding. The way the form handles additional jobs and working spouses is also more open and direct, and you can specify additional jobs. This new format means the process can take a while longer if your taxes are more complicated.
When filling out your form, be careful not to use line 4 of the form for self-employment income — it’s for income like dividends, interest, or retirement withdrawals.
The Tax Cuts and Jobs Act and its implications
In 2018, the United States lost more tax revenue than any other developed country thanks to Trump’s Tax Cuts and Jobs Act (TCJA) of 2017, which led to around $1.5 trillion worth of tax cuts.
The cuts included the permanent reduction of the corporate tax rate from 35% to 21%, plus a reduction in individual tax rates and limits on deductions from state and local taxes. Overall, the government reduced corporate taxes by 0.7% and income tax by 0.5%.
From 2017 to 2018, the tax-to-GDP ratio decreased 2.5%, from 26.8% to 24.3%.The OECD’s overall tax-to-GDP ratio remained unchanged over the same period (moving from 34.2% to 34.3%), proving that the US was the anomaly.
Naturally, these cuts have had a huge impact on the everyday lives of Americans.
The impact of tax cuts
Trump promised the tax cuts would boost business investment and economic growth, but the results are yet to be seen. According to the nonpartisan Congressional Research Service, only 2.9% of economic growth comes from tax cuts — a minimal chunk.
The Democratic Party presidential candidates have criticized the cuts, complaining they disproportionately benefit the most wealthy in society. The party aims to revise the tax code to introduce measures like wealth taxes.
The TCJA has also doubled the inheritance and gifts allowances. As a result, fewer people will be subject to the hefty 40% tax on estates.
Previously, the gift and estate tax exemption was $5.49 million per person — now, the threshold is $11.58 million. Plus, everyone can give $15,000 worth of gifts per year.
Although some people will be grateful for the change, it’s a move that mostly benefits the most wealthy in society.
It’s always a good idea to start the new year with a savings plan. How does the TCJA affect that?
This fiscal year, the standard deductions have increased to $12,400 for individuals filing alone, slightly more than the figure of $12,200 for the previous year. For married couples filing together, the deduction is now $24,800, compared to $24,400 last year. For the elderly and the blind, the figures remain the same.
If possible, save a little more in your retirement account — it’s never too early to start. The IRS also adjusts for inflation by increasing how much you can save in your 401(k) each year.
This new year, the IRS raised the contribution limit to 401(k)s, 403(k)s, and most 457 plans to $19,500, compared to just $19,000 last year. If you’re 50 or older, you can save an extra $6,500 a year compared to $6,000 last year. This applies to both traditional and Roth IRA accounts.
Unfortunately, the IRS limits the ability of higher-income individuals to contribute to their Roth IRA accounts. For the current tax year, if your adjusted gross annual income exceeds $124,000, you won’t be able to make a full contribution to your Roth IRA. For those who file jointly, the threshold is $196,000.
However, you could open a Backdoor Roth IRA, which allows you to make non-deductible contributions after taxes to a traditional IRA and then convert it to a Roth IRA.
Currently, the rules start that once you turn 70.5 years old, you must begin withdrawing funds from your retirement account, known as required minimum distributions (RMD). However, there are some finer details to be aware of.
Anyone born before July 1, 1949 should make their first RMD by April 1 of the calendar year after they turn 70.5, whereas those born after June 30, 1949, have until the calendar year after they turn 72.
These rules apply to almost all pension accounts including Traditional Individual Retirement Arrangements (IRA), Simplified Employee Pensions (SEP), Savings Incentive Match Plans for Employees (SIMPLE), 401(k)s, 40(b)s, and 457(b)s. The exception is Roth IRAs, which don’t require distributions as long as the owner remains alive.
The IRA administrator or sponsor should calculate how much RMD the owner needs to pay. Although owners can withdraw the full amount from one or more accounts and their RMDs, calculations must be made separately for each account.
Health savings accounts
If you have a high-deductible health plan (HDHP) this fiscal year, you’ll most likely have access to a health savings account (HSA). These accounts allow you to save pre-tax money and use it toward health-related expenses like copayments and deductibles.
This year, anyone with an individual plan can save up to $3,550. Those with family plans can save up to $7,100. These numbers have increased from last year.
Health Savings Accounts (HSAs) differ from flexible spending accounts (FSAs). When you have an HSA, you can transfer the balance from one year to the next, but you should use your FSA by the end of the year. You can save $2,750 in an FSA.
Important new state laws and updates for 2020
The recent federal tax changes and cuts aren’t the only new regulations that could impact you and your wallet. There have also been lots of changes at the state level that may affect you.
State governments have passed various regulations regarding fuel, weapons, immigration and more. Plus, the Wayfair fallout will change how businesses are taxed in some states.
Make sure you’re informed.
In 2018, hybrid-electric and plug-in cars only accounted for 2% of new car sales, but experts expect this figure to increase considerably over the next decade. It’s been partly problematic because fuel revenue usually supports public infrastructure like the construction and maintenance of roads and bridges.
This is new terrain for legislators.
If you have an electric car, expect an extra charge to compensate for the fuel revenue loss. In Hawaii, the fee will be $50, in Kansas $100, and in Alabama and Ohio $200. These rates went into effect on January 1 of this year in eight states.
It’s the first time most states have imposed special rates on vehicles that don’t require gasoline, showing us that renewable energies can damage economic growth.
Other states want to incentivize the use of electric vehicles. Illinois promised a 2-year registration value of $35 for electric cars — much cheaper than the standard rate of $98. However, electric car owners will have to pay an annual fee of $148 in total, because of increased registration fees and $100 to offset lost taxes on gasoline.
California accounts for half of the sale of electric cars in the US and has brought in a fee of $100 for anyone who buys a new electric vehicle. Other states that have implemented new electric car fees for this year are Iowa, Oregon, and Utah.
In Colorado, weapons are a sensitive issue, and a new law allows people to report anyone with weapons they consider a threat to society. As a result, the government can confiscate their weapons for up to 364 days.
In contrast, Tennessee has made it easier to obtain concealed weapons permits. It’s no longer necessary to undergo training to carry a firearm, and participants can now take the training online.
Arkansas has always kept a low profile with immigration issues. Still, its government has now approved a law that cuts state funding to sanctuary cities: places that help refugees and don’t comply with federal immigration rules.
Other Republican states are moving in the same direction, but Democratic states have worked to ensure immigrants’ protection.
In Massachusetts, legislators finally reduced the state income tax, after 20 years of build-up.
A 2000 ballot proposed to reduce the state tax rate from 5.95% to 5% in 2003, but legislators froze the rate at 5.3% in 2002. Instead, they passed a law to reduce the rate more gradually when the state reached a particular income reference score.
In January, the Massachusetts government finally reduced state taxes to the desired rate of 5%.
Missouri has reduced its corporate tax rate from 6.4% to 4%, one of the country’s lowest rates. The change took place a few hours before the former governor resigned in 2018
However, changes in calculation methods could lead to higher tax bills for certain multi-state companies, so not everyone will benefit.
In 2018, the Supreme Court passed the South Dakota V. Wayfair ruling, which allowed states to tax businesses that don’t have a physical presence. The legislation marks a change from the face-to-face standards established in 1992.
Since the Wayfair ruling, most states began taxing businesses based on economic activity rather than physical presence.
The 2017 law also created a new category for taxing foreign income and a way to tax multinational companies on offshore income.
Global Intangible Low-Taxed Income (GILT) refers to income from a corporation’s foreign affiliates in the form of intangible assets (like patents and copyrights). States can now tax this money, and many have already started to do so.
Other state rules
There are some further changes to be aware of. Twenty-one states have increased the minimum wage for 2020, including several increases to $12 per hour. Also, Illinois is the eleventh state to legalize marijuana for recreational use.
California extended the deadlines for lawsuits or criminal proceedings related to sexual abuse, so victims have more time to file. Another ten states followed because of the sex crime scandals within the church catholic.
In California, legislators also reduced the use of lethal force within the police, only allowing officers to defend themselves against a threat of death or serious injury (to an officer or pedestrian). The state also created more state-level oversight for doctors who give children medical exemption for vaccinations. This means investigating doctors who grant more than five exemptions in a year and schools with the lowest rates of vaccination (95%).
Make sure you keep up with tax changes and updates
Every fiscal year brings new tax changes and updates. It can seem overwhelming to stay on top of everything, esp[ecially when you’re not sure which legislations affect you.
However, consulting a tax or legal professional for advice can help, especially if you run a business or you’re an immigrant who struggles to understand the US system.
Contact us by filling out our form, calling us (+1 (704) 243-6333) or visiting our office at 4801 E Independence Blvd, Charlotte, NC 28212.