Looking back even a year can be a real “whoa” moment when you’re a parent. It’s only been a year since my baby was that tiny? Whether your kids’ current milestones include first steps, loose teeth or college applications, every year of family life brings something new.
Taxes go through changes year to year, too. They’re not as cute as baby milestones, but tax season updates can affect how much you’ll pay and what kind of refund you might be able to expect.
The biggest change in 2020? Tax season got bumped to July in light of the coronavirus pandemic. So now that tax season is here (...again?) we wanted to take a look at what parents should know this time around.
Ready to take a look at what else has changed for 2020?
Here’s what to expect on this year’s tax return.
The IRS lets taxpayers lower their tax bill by keeping a certain portion of their income free from income tax (otherwise known as taking a deduction from your income). If the standard deduction amount the government offers is higher than the total you could claim by itemizing eligible expenses and donations through the year, you’re better off taking that option.
A few years ago, the standard deduction nearly doubled, from $12,700 to $24,000 for married couples filing jointly. Individual taxpayers saw a jump from $6,250 to $12,000. This year’s increase isn’t as dramatic, but every dollar counts.
The standard deduction for 2019 taxes (that is, the taxes due in April 2020) is $12,200 for taxpayers filing an individual tax return. Married couples filing jointly can take a standard deduction of $24,400.
Steven Rosh, a CPA in Kentucky, says, “For most families today, the new higher standard deduction pretty much wipes out them having to itemize their deductions.” After all, you will generally want to go with whichever is higher: your itemized list, or the standard deduction. That means many families can skip adding up deductible items like mortgage insurance or charitable donations, because the $24,400 standard deduction is higher.
Taxpayers who are age 65 or older, or who meet IRS criteria for blindness, can claim additional deductions.
Old rules let you take a dependent exemption of around $4,000 each for you, your spouse and each dependent in your household. Families with three or more kids are hit especially hard by losing this exemption. Rosh says that clients with larger families often lose $1,000 to $2,000 of their refund due to this change.
Think of it this way: Previously, a family of five would get to take about $20,000 in exemptions off of the income that the IRS taxes. If they were taxed at a 25 percent rate, that means they’d owe $5,000 less because of the exemptions. With this exemption gone, that family’s taxes are higher.
One way to help offset the loss of the exemption is to make sure you claim any tax credit you can for your kids. (A tax exemption reduces the amount of your income that the IRS takes taxes from. A tax credit reduces the amount of taxes you owe, dollar for dollar.)
The Child Tax Credit for dependent children under age 17 is worth up to $2,000 per qualifying child. Qualifying children can include half-siblings, stepsiblings, nieces and nephews, and various others you claim as a dependent. (If you have dependents who turned 17 or older before the end of 2018, you may still be able to claim a tax credit of up to $500 for each of them.)
This credit applies to most taxpayers, but does depend on your family’s income: The Child Tax Credit begins to phase out when your income hits $200,000 for a single taxpayer, or $400,000 for married couples filing jointly.
Are you hoping to expand your family in 2020? Babies are expensive, and your retirement funds may be a better new-baby nest egg than they used to be.
A new act called the Setting Every Community Up for Retirement Enhancement (SECURE) Act lets each parent take $5,000 from a retirement plan like a 401(k) or IRA within a year of a birth or adoption. You’ll pay income tax on this “qualified birth or adoption distribution” (if applicable) but you won’t get hit with the usual 10% fee that comes with early distributions.
(Are you expecting? Here’s what you should know about applying for life insurance while pregnant.)
The SECURE Act might also make it easier for part-time workers to save for retirement. The old rules said employers could legally exclude employees who worked less than 1,000 hours per year from participating in a 401(k) or similar plan through work. New rules allow part-time workers who have worked at least 500 hours per year for three consecutive years to be eligible for their employer’s retirement plan.
This change is especially helpful for working mothers, who are more than twice as likely to work a part-time job than fathers. Opening up eligibility for retirement savings plans for more part-time workers will likely give many families more options to save for the future.
The downside is that it could take until 2024 for some plan sponsors to put this rule into effect. That is, if you’re working part-time and will be eligible under SECURE Act requirements, you might not get to start saving in your company’s retirement plan until 2024.
While we’re talking retirement planning, IRA retirement savers should take note. When the Tax Cuts and Jobs Act (TCJA) of 2017 went into effect, it changed the rules for a process called “recharacterizing” IRA contributions.
With a traditional IRA, your contributions are tax-deductible right now, meaning that you will get a tax break this year. With a Roth IRA, you forgo the near-term tax benefit but in exchange, you get to withdraw your money down the road without paying any taxes, including on the earnings.
Old laws let you contribute to one kind of IRA, change your mind about which account is right for you, and “recharacterize” the contribution as the other kind of IRA as long as you did this in the same year.
“People make choices when they make contributions. They might make the wrong choice,” says Alan Gordon, a CPA in the Washington, D.C. area. “[The IRS is] trying to prevent you going back and forth.”
New TCJA rules say you can’t recharacterize conversions or rollovers from other retirement accounts into a Roth IRA. Once those funds land in your Roth account, they are there to stay. In other words, recharacterizing only goes in one direction: from traditional to Roth, but not the other way around.
Bottom line? When you’re setting up an IRA, make sure you’re certain about whether you want an IRA or a traditional, because the decision is likely to stick.
Not all families share the same roof. Parents who are separated or divorced have new tax rules, thanks to the TCJA.
As of January 1, 2019, alimony payments are no longer tax deductible if you’re the paying spouse. If you’re receiving alimony payments, you no longer include those as taxable income on your tax return.
“That’s the same as child support, where there’s no deduction,” says Gordon. “It’s a real positive for the person receiving alimony. If you’ve got someone who’s relatively low income and they’re receiving alimony, they’re essentially getting free money.”
Meanwhile, people paying alimony will have a larger tax burden. They won’t get the deduction, and they’ll be responsible for paying taxes on the alimony payments.
Advocates say this change benefits the spouse who has greater need of the money. Some critics of this law say fewer couples will be able to work out an alimony agreement, since there’s not as much incentive for the paying spouse.
This change applies for divorce or separation agreements that were made or modified after December 31, 2018. If you’ve been sending or receiving alimony payments for years and haven’t changed your agreement, these tax changes don’t affect you. But if your divorce was finalized in 2019 or later, or you’re considering making changes to an older agreement, keep in mind that alimony won’t work the same way it has in the past.
(Here’s what else you should know about estate planning for blended families.)
Specifically, why you should consider making it smaller.
A tax refund may feel like a windfall, but the money was really yours all along. Taxes come out of your paycheck all year. Overpay, and Uncle Sam owes you a refund of the extra. Underpay, and the IRS will come for the rest—possibly with penalties attached.
Both Rosh and Gordon say aiming for a high tax refund isn’t a great financial move, even if it feels good in the moment. You’re essentially letting the government hang onto your money for a whole year, without giving you anything in return.
“Think of a tax return as a reconciliation,” Gordon says. “You’re going to reconcile what you paid through taxes and withholdings to what you should have paid. If you’re disciplined enough to put it aside in a savings account, you might be able to make something on it. As long as there’s no penalties involved, it’s okay to owe the government.”
Rosh says he often sees clients who deliberately over-withhold from their paychecks, using the prospect of a high refund almost like a savings plan.
“I’m a big advocate that I can spend my money better than the government can,” Rosh says. “I coach my clients that it’s the worst thing to get a $7,000, $8,000, $10,000 refund.”
Adjusting your tax withholdings might lower your refund, but it could free up more to use on something else, like getting life insurance. You could even take advantage of an employer match, in which your employer matches your 401(k) contributions. It’s smarter financial planning to get that extra money from your employer than let the government sit on your cash for most of the year.
Generally, the IRS says you might want to increase your withholding if you have multiple jobs or other sources of income. If you’re eligible for more tax credits or deductions (new baby, anyone?), then you might be better off decreasing your withholding amount.
If you’ve gone through significant household or job changes recently, now is a great time to look at your taxes with fresh eyes. The IRS released a new version of the W-4 form for tax withholdings, which is designed to be less complex and more straightforward. Keep in mind that you’re not restricted to setting withholdings once a year, either. You can readjust throughout the year to stay on track.
Who says filing taxes can’t be fun? Well, probably a few people. But staying up to date can make tax season that much breezier.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards. This article has been reviewed and approved by a compliance professional who is a licensed life insurance agent.
This article is designed to provide general information on the subjects covered and the views represented herein belong to the author and are not intended to be used in the making of any financial decisions. If you do have questions regarding your specific situation, you should consult with a tax professional.
Fabric Insurance Agency, LLC offers a mobile experience for people on-the-go who want an easy and fast way to purchase life insurance.
No time + needing to look after the ones you love = a quarterly checklist to help keep you on track, so you can get back to wiping boogers and giving snuggles.
Smoking is a relevant factor when underwriters figure out whether they can offer you a policy and at what price. Here’s what it means if you quit.
I created the Mental Health and Wealth Challenge to engage in self-care that was meaningful, simple, and free -- and only takes 13 minutes a day.
Wondering if a 10-year term policy might be right for you? Ask yourself these questions about your family's financial situation.
Fabric Instant is an Accidental Death Insurance Policy (Form VL-ADH1 with state variations where applicable) and Fabric Premium is a Term Life Insurance Policy (Form ICC16-VLT, ICC16-VLT19, and CMP 0501 with state variations where applicable). Policies are issued by Vantis Life Insurance Company (Vantis Life), Windsor, CT (all states except NY), and by Vantis Life Insurance Company of New York, Brewster, NY (NY only). Coverage may not be available in all states. Issuance of coverage for Fabric Premium is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Policy obligations are the sole responsibility of Vantis Life.
Plan like a parent. is a trademark of Fabric Technologies, Inc.