The IRS is heading into its busiest week of the tax season, with millions of Americans expected to file their federal income tax returns. While the changes in tax law for this year aren’t as significant as in 2019, which followed the biggest overhaul in a generation, there are some changes people should be aware of. Here’s what changed since last tax season.
After the standard deduction doubled in 2018, the number of taxpayers who claimed it instead of itemizing on their taxes jumped sharply. This year, an estimated 90% of taxpayers are expected to claim the deduction.
The deduction has also been increased this year to keep pace with inflation. Single individuals now get a standard deduction of $12,200, and married individuals filing jointly qualify for a standard deduction of $24,400. Individuals who qualify as head of household get a standard deduction of $18,350.
Some people may still want to run through the exercise of deciding whether to itemize or not. The decision comes down to whether your deductible expenses are greater than the standard deduction. Tax preparation software or a tax professional can walk you through this with ease.
New this year: There is no longer a penalty on federal taxes for not having health insurance — something that was put in place by the Affordable Care Act. So while “the mandate for having insurance theoretically still exists,” you won’t pay anything to the feds should you choose not to follow it, Jonathan Medows, a CPA based in Manhattan, told CBS MoneyWatch.
However, taxpayers should note that four states, along with Washington, D.C., retain their own penalty for lacking health coverage: California, Massachusetts, New Jersey and Rhode Island.
Historically, if you had medical expenses equaling 7.5% or more of your income and you itemized your deductions, you could use those medical expenses to reduce your income — thereby paying less in taxes.
Last year, the minimum amount a person was required to spend was going to reset to a higher amount, but Congress stepped in at the last minute to keep it at 7.5%.
“If you have a medical condition and you have unreimbursed medical expenses, you should be able to itemize more,” Medows said. “This should be beneficial for a lot of people.”
Divorce is now tax-neutral
Anyone who got divorced after 2018 and pays alimony can no longer deduct alimony payments. And ex-spouses who receive alimony are no longer required to claim it as income. Got divorced before 2018? The old rules still apply unless you update your decree to state specifically that the new rules are reflected.
Congress recently passed a bill that include several tax “extenders,” which renew tax provisions that had expired or were going to expire soon. Here are a handful that you may want to note:
- People who are required to pay private mortgage insurance along with their mortgage can once again deduct it. Kathy Pickering, chief tax officer at H&R Block told The Associated Press that this represents a substantial expense for some — in the $2,500 to $4,500 range.
- Another home-related extender: a $500 lifetime credit for making certain energy-efficient improvements to your home, such as buying a high efficiency furnace. While many people have already taken advantage of this in years past, Pickering said newer homeowners may want to consider if they can benefit.
- People who suffered a foreclosure and had their debt canceled just got some relief.
The IRS considers that canceled debt as income and therefore subject to taxes. However, there had long been a provision that would waive this if the foreclosure was on a primary residence. Last year, that wasn’t the case.
The waiver has now been reinstated and is extended retroactively, so people who had to pay tax on a canceled debt of this sort can file an amendment. Pickering said this is a provision that affects few people but “has an extraordinary financial impact.”
The IRS has been trying to keep up with the popularity of cryptocurrency, such as bitcoin. For now, such digital currencies are generally seen as property, not currency. That means anyone who trades in it faces the same tax implications as if they were trading stock.
The IRS last year put many taxpayers on notice about improperly reporting their crypo transactions, or even failing to report them altogether. As such, the agency is increasing its educational efforts and criminal investigations.
Additionally, all taxpayers will must answer a question about their involvement in any virtual currency transactions. If they have received, sold, sent, exchanged or otherwise acquired any cryptocurrency, they must fill out a new form.
Tax experts say there may still be some confusion, but suggest that anyone who does trade cryptocurrencies should keep close track of all their own activity to make sure they are not stepping on the wrong side of the law.