Every year brings a number of changes in various financial rules and regs that impact our personal financial planning. What follows is our annual guide to some of the more significant changes that have been announced for the New Year.
If you participate in a 401(k), 403(b), 457(b) or the federal government’s Thrift Savings Plan, you can contribute $19,500 in 2020 — up $500 from the limit in 2019. Participants age 50 or older can add another $6,500 — up from $6,000 in 2019.
Those contributing to an IRA are stuck with 2019's $6,000 annual limit. People age 50 and older can add another $1,000 — also unchanged from 2019.
IRA contributors who are impacted by income phase-outs — those covered by a workplace retirement plan or married to someone who is — can make a bit more money in 2020 and still either deduct their full contribution to a traditional IRA or make a contribution to a Roth IRA. The details are available on the IRS website.
Health Savings Accounts
For those with a high-deductible health insurance plan, singles can save a tax-deductible $3,550 in a Health Savings Account in 2020 — $50 more than in 2019. Families can save $7,100 — up $100 from 2019. If you are 55 or older, or will turn 55 in 2020, you can save an additional $1,000.
In order to be able to use a health savings account, your health insurance deductible must be at least $1,400 for singles and $2,800 for families — up from 2019's requirements of $1,350 and $2,700 respectively.
Remember, unused money in your HSA can be carried over from year to year. An HSA can even serve as an additional tax-advantaged way to save for retirement expenses.
If you’re eligible to contribute to a flexible spending account (FSA) where you work, the IRS has increased the contribution limit to $2,750 for 2020 — up from $2,700 last year. The IRS has given employers the freedom to allow employees to carry over up to $500 of unused money from one year to the next or to use up unspent money in a two-and-a-half month grace period at the start of a new year. Employers are not obligated to offer either benefit, and if they choose to do so, they can only offer one (not both). Check with your HR department to find out about your company’s policies.
Tax brackets and standard deductions
2020 tax brackets have been adjusted for inflation. You can see all of the planned changes in this Forbes article.
Remember, 2018 ushered in a thoroughly revised tax code, with lower rates in five of the seven tax brackets, much higher standard deductions (as the Forbes article details, even those are increasing a bit further in 2020), the elimination of personal exemptions, and an expanded child tax credit.
Social Security and Medicare
While the Social Security withholding rate will remain as it has been, (6.2% of income for employees and 6.2% for employers), the maximum amount of earnings subject to Social Security tax in 2020 will increase from $132,900 to $137,700.
The Medicare withholding rate will remain as it has been (1.45% of income paid by employees and 1.45% paid by employers); there is no limit on the amount of income subject to this tax.
High earners will continue to be subject to two additional Medicare taxes thanks to provisions in the Affordable Care Act. First, an additional .9% Medicare payroll tax is owed on income above $200,000 for singles or $250,000 for married couples filing jointly. Those income thresholds are unchanged from 2019.
Second, anyone making more than the income thresholds just mentioned may be subject to an additional 3.8% Medicare tax on net investment income, including interest, dividends, capital gains, the taxable portion of annuity payments, and more. This tax is owed on the lesser of net investment income for the year or the extent to which modified adjusted gross income (MAGI) exceeds the thresholds mentioned above. The tax is not owed if MAGI does not exceed those thresholds. If income does exceed those thresholds, the tax is only owed to the degree that there is net investment income.
The Social Security earnings test limit is going up in the new year. For 2020, the earnings limit for workers who are younger than full retirement age (age 66 for people born in 1943 through 1954) will increase to $18,240 per year — up from $17,640 in 2019. That means $1 will be deducted from benefits for each $2 earned over $18,240.
The earnings limit for people turning 66 in 2020 will increase to $48,600 — up from $46,920 in 2019. That means $1 will be deducted from benefits for each $3 earned over $48,600 until the month the worker turns age 66.
Those receiving Social Security will see a 1.6% cost-of-living increase in their checks in 2020 — down from last year's 2.8% hike.
Very few households have to worry about federal estate taxes anymore due to high estate tax exemptions. In 2020, that exemption is $11.58 million per person — up from $11.4 million in 2019. Married couples can use twice that amount.
Keep in mind that while you can't control what happens in the markets, you can control is how much you contribute to your retirement plan and, if applicable, a health savings account. How will the higher contribution limits or other changes mentioned above impact your financial planning for 2020?