The most common tax problems for 2020

We’re roughly halfway through 2019, which means the 2020 tax season will soon be upon us. But rather than wait until next March or April to think about their tax returns, taxpayers — and their advisors — should proactively consider some of the challenges that they could face.

While it’s been more than a year since the Tax Cuts and Jobs Act went into full effect, many Americans are still relatively uncertain of how these changes impact them. The 2020 tax season could be the season that we see old problems resurface and a set of new issues emerge.

Here are some of the common tax problems of 2020 that we should all be aware of.

1. The individual mandate penalty

Demonstrators outside the Supreme Court in advance of the court's rulling that the ACA was constitutional
A demonstrator in support of U.S. President Barack Obama's health-care law, the Affordable Care Act (ACA), holds up a "ACA is Here to Stay" sign after the U.S. Supreme Court ruled 6-3 to save Obamacare tax subsidies outside the Supreme Court in Washington, D.C., U.S., on Thursday, June 25, 2015. The U.S. Supreme Court upheld the nationwide tax subsidies that are a core component of President Barack Obama's health-care law rejecting a challenge that had threatened to gut the measure and undercut his legacy. Photographer: Andrew Harrer/Bloomberg
Almost all of the Tax Code changes stemming from the Tax Cuts and Jobs Act went into effect during 2018. However, a few didn’t become active until this year. The change to the shared responsibility payment is one of these.

The shared responsibility payment, which is commonly referred to as the individual mandate penalty, was previously introduced under the Affordable Care Act. It essentially required people to have some form of health insurance (Obamacare, private or otherwise). If a taxpayer couldn’t prove they had health insurance, they owed a penalty with their taxes.

Starting with the 2020 tax season (fiscal year 2019), there’s no longer a federal penalty. However — and this is where the confusion exists — there are still some state-based penalties. For example, New Jersey, Massachusetts and Washington, D.C., all still have some form of penalty in place. Taxpayers will need to be cautious in this regard and do their research.

2. Changes to retirement contribution limits

Starting with this year, taxpayers are able to stash away more money in tax-advantaged retirement accounts, which could allow individuals to lower their tax burden. Here’s a breakdown of the changes:
  • The 401(k) base contribution is up to $19,000 (it was $18,500 in 2018);
  • The 401(k) catch-up contribution remains unchanged at $6,000;
  • The IRA base contribution (whether Roth or traditional) is up to $6,000 (it was $5,500 in 2018); and,
  • The IRA catch-up contribution remains unchanged at $1,000.
While these may not seem like major increases, they’re important. The $500 increase in IRA contribution limits is especially noteworthy, as these limits hadn’t budged since 2013.

3. Changes to HSA contribution limits

In addition to increasing the amount of money taxpayers can contribute to qualifying retirement plans, health savings accounts are also getting a tiny boost this year. For those with high-deductible policies that qualify under HSA guidelines, the changes are as follows:
  • Self-only coverage: now $3,500 (up from $3,450 in 2018); and,
  • Family coverage: now $7,000 (up from $6,900 in 2018).

Again, these slight adjustments won’t make anyone rich, but they are worth noting and could cause some confusion come April 2020.

4. The medical expense deduction threshold

There’s been a lot of back and forth regarding the threshold for deductible medical and dental expenses over the past decade. In 2010, the Affordable Care Act raised the number from 7.5 percent to 10 percent of adjusted gross income. This made it a lot more difficult for people to qualify.

Then came the Tax Cuts and Jobs Act, which brought the threshold back down to 7.5 percent in 2017 and 2018. Unfortunately, it’s returning to 10 percent this year.

What does all of this mean? Basically, if a taxpayer plans on itemizing in 2019, their unreimbursed medical and dental expenses need to exceed 10 percent of their adjusted gross income in order to qualify as a deduction.

5. Confusion over alimony deduction

One hundred dollar bill in a gold wedding ring
The elimination of the alimony deduction is another one of the Tax Cuts and Jobs Act changes that starts this year. This means that alimony payments tied to any divorce or separation agreement that’s made this year or thereafter will not be deductible. For some taxpayers, this is a pretty significant change that could cost thousands of dollars.

6. Failure to report all income

Reporting income used to be a pretty straightforward process. Most people were either W-2 employees or self-employed with one or two 1099s. But as the gig economy has expanded, more and more taxpayers have three, four or five different streams of taxable income that nobody else is reporting. Expect to see less-organized taxpayers fail to report all of their income in 2020. Some of this will go undetected, while others will get slapped with penalties.

7. No quarterly estimated taxes

With more freelancers than ever before, this also means more taxpayers will be required to pay quarterly estimated taxes for the 2019 tax year. Unfortunately, some people are not aware they have to do this, or don’t know how and when to make their payments.

A failure to pay quarterly estimated taxes does a couple of things. First, it leaves the taxpayer with a massive tax bill come April. Second, it can actually trigger late fees and interest on top of the base tax figure. For high earners, this could amount to thousands of dollars in additional taxes.

The IRS has a pretty good resource on self-employment and how to pay taxes. It explains who is required to pay quarterly taxes, how to make the payments, when to submit the payments, and how these payments impact the annual return. Freelancers and self-employed professionals should read it to ensure they don’t run into problems come April.

8. Underpaying estimated tax payments

Making quarterly estimated tax payments on time is only half the battle. For inexperienced freelancers, underestimating the amount of taxes they owe is another huge problem.

As the name suggests, quarterly tax payments are estimates of what a taxpayer thinks they’ll earn over the course of a given year. In order to accurately estimate their tax burden, they must keep meticulous records and run calculations to generate a ballpark estimate. It’s OK if they slightly underpay, but it’s much better if they slightly overpay. This ensures they end up getting a small amount of money back in April (as opposed to forking over even more money).

While every taxpayer has different earnings and deductions, it’s a good rule of thumb for most taxpayers to set aside somewhere between 22 and 25 percent of every payment into a savings account that’s explicitly reserved for making payments throughout the year.

9. Errors on tax forms

It’s amazing how many people make simple errors on their tax returns, which leads to delays in processing and may actually cause returns to be flagged by auditors.

The most common tax form errors are incorrect Social Security numbers, wrong bank account information (including erroneous routing numbers), lack of proper signatures, and missing information.

10. Failure to file on time

Finally, there’s the problem of not filing taxes on time. For most people, this seems like a pretty black-and-white issue, but 20 percent of people continue to file their taxes late. As a result, they face penalties, fees and other inconveniences. Expect this problem to continue in 2020.