The US tax system isn’t simple. It’s so far from simple that it supports a whole industry of tax experts who make a living keeping us out of trouble with the IRS. Unfortunately, many people can’t afford to hire a tax expert and must navigate the system themselves. Given the complexity, that would be difficult even if things stayed the same from year to year. Unfortunately, they don’t.
Taxpayer First Act
Almost every year, there are some significant changes to the tax system, and 2020 is no exception. There’s a really big change coming online in January — the Taxpayer First Act, aimed at giving taxpayers more safeguards against errors or overreach by the IRS.
Under the Taxpayer First Act, the IRS will be forbidden to contact anyone other than the taxpayer about the determination or collection of a tax liability unless the taxpayer has been given 45 days’ notice. They must also notify a taxpayer if there’s any suspicion that someone has been making unauthorized use of that taxpayer’s identity. This is a sensible precaution against identity fraud being used to steal refunds. From January, if a taxpayer reports that a refund wasn’t electronically transferred into their account, the IRS will be able to work with financial institutions to get the money back and ensure it’s sent to the right account.
W-4 Gets a New Look
Another major change is the redesign of Form W-4, the Employee’s Withholding Certificate. This has been updated to make it simpler to complete, more accurate and less of a burden for employers and payroll processors. If all goes to plan, this should make the amount held back for tax in each paycheck more accurate. The new version of the form was released in November 2019 and should be used from January 2020.
Changes to 401(k) rules will let you save more for retirement. The contribution limit rises $500 to $19,500, while the catch-up limit for older employees will increase by $500 to $6,500. The total limit for employer and employee contributions goes up to $57,000.
An increase in the compensation limit to $285,000 will allow some people to keep making salary deferrals if their 401(k) plan limits participation for higher earners. On the other hand, if you’re not a high earner, you can benefit from an increase in the Saver’s Credit, which applies to contributions of up to $2,000 for individuals and $4,000 for couples.
There aren’t any revolutionary tax reforms coming up in 2020, but if you know what’s different, you can both avoid problems and save more efficiently. It’s always worth knowing about changes to tax law — and make sure you research any changes to your state and local taxes, too.
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