A new year means a whole new set of tax laws to follow. Thankfully, these four changes are all positive ones that can put more money in your pocket in the course of 2020.
1. A higher standard deduction
Tax filers have two choices when filling out their yearly returns: They can take the standard deduction as dictated by the IRS, or they can itemize their deductions in an attempt to eke out more tax savings. For the majority of taxpayers, itemizing doesn't make sense, especially since the 2018 tax code overhaul virtually doubled the standard deduction a couple of years back.
In 2020, the standard deduction has risen once again. It now stands at $12,400 for single tax filers, $24,800 for married couples filing jointly, and $18,650 for heads of household. Unless you pay a lot of mortgage interest, have high state and local taxes, and give a lot to charity, it generally pays to stick to the standard deduction. Doing so also makes the tax-filing process less complicated.
2. Higher 401(k) contribution limits
Each year, the IRS sets limits for retirement plan contributions. Though the limits for IRAs aren't changing in 2020, those who save in a 401(k) get an even greater opportunity to build wealth for their later years. The current annual 401(k) limits are $19,500 for workers under 50 and $26,000 for those 50 or older. This represents a $500 jump for younger workers compared with 2019, and a $1,000 boost for those 50 or older.
3. Higher HSA limits
Funding a health savings account (HSA) is a great way to set aside money for medical bills and reap some tax benefits in the process. HSA contributions go in tax-free, and unused HSA funds can be carried forward indefinitely and invested for added tax-free growth. Withdrawals are tax-free as well, provided they're used for qualified medical expenses.
In 2020, you can contribute up to $3,550 to an HSA if you have individual health coverage. For family health coverage, that limit doubles to $7,100. And if you're 55 or older, you get a $1,000 catch-up, similar to the catch-up you get in an IRA.
4. Higher income limits for Roth IRAs
Roth IRAs offer a number of key benefits: Investment growth in these accounts is tax-free, withdrawals in retirement are tax-free, and there are no required minimum distributions. The only catch with Roth IRAs is that higher earners are barred from contributing to them directly. But this year, you get a little more leeway if you're hoping to fund a Roth IRA. That's because the income thresholds at which contributions phase out have increased from 2019.
Currently, contributions don't begin to phase out for single tax filers until their income reaches $124,000, and contributions are only barred completely for incomes of $139,000 and over. Married couples, meanwhile, can earn up to $196,000 before contributions start to phase out, and they're only barred completely past $206,000 of joint income.
Tax changes don't always work out in filers' favor. But these updates can all help you save money in one way or another. And that's something to be thankful for.