To Save or To Spend, That’s the question. With the Pandemic looming over our heads, the recently changed Tax laws could probably help you decide.
US Individual tax update 2020 has been a welcome surprise for all of us. In addition to several changes brought on by coronavirus-related legislation, other changes for the 2020 tax year were set to happen anyway. The standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly. Income tax brackets increased in 2020 to account for inflation.
Apart from the above, the changes include new standard deduction amounts, income thresholds for tax brackets, certain tax credits, and an increase in retirement savings limits.
What has remained the same are: Deductions for medical and dental expenses, and state and local sales taxes.
Higher Standard Tax Deductions in 2020
When one pays taxes, one has the option of taking the standard deduction or itemize their deductions. If you itemize, you calculate your deductions one by one. Itemizing is more of a hassle, but it’s worth it if your itemized deductions exceed the amount of the standard deduction.
For tax year 2020, the standard deduction went up slightly to adjust for inflation.1
Please bear in mind that every situation is different whether you should take the standard deduction or whether you should itemize. It is always best to talk to a tax professional who'll figure out what's best for you.
Health Saving Opportunities
Good news for the ones wanting to save more in health saving accounts, you’ll be able to save more as of 2020.
These accounts allow you to put away pre-tax or tax-deductible money and have it grow free of taxes. You can take a tax-free withdrawal to cover qualified health expenses.
This year's benefits include saving up to $3,550 if you’re an individual with self-only health coverage, which is up from $3,500 in 2019. Account holders with family needn't be disappointed as they can save up to $7,100 in this account, up from $7,000 in 2019.
Coronavirus Pandemic and tax
Did you really think the pandemic was done and dusted? However bad the pandemic is, the response of the government to it has created a tidal wave whose effects will be felt by you when you file your taxes for the previous year. Here’s a few pointers to keep in mind.
Your stimulus check will not count as taxable income. Instead, it’s being treated like a refundable tax credit for 2020. In simpler terms: Your stimulus check is sort of like an advance on money you would have received anyway as part of your tax refund in 2021.
Many of our fellow Americans lost their jobs (at least temporarily) after the pandemic shut down a huge part of the economy and hence had to turn to unemployment insurance. All the individuals who received unemployment benefits WILL HAVE TO PAY INCOME TAX on that money.
If you chose not to have taxes withheld from your benefits when you signed up, you’ll either have to pay quarterly estimated taxes or set aside enough money from your unemployment benefits to pay your taxes come Tax Day.
Added Gift and Estate Tax Savings:
There’s some good news for the ones with millions lying around. The Tax Cuts and Jobs Act nearly doubled the amount that decedents can bequeath in death — or gift over their lifetime — and shield it from federal estate and gift taxes, which are 40%.
For 2020, the lifetime gift and estate tax exemption was bumped up again. This year, the lifetime exemption is $11.58 million per individual, up from $11.4 million in 2019.
Finally, the annual gift exclusion — the amount you can give to any other person without it counting against your lifetime exemption — holds steady at $15,000 for 2020.
For further clarity, please view the tax update webinar section.