17 Tax Law Changes You Need to Know Before Filing a Return in 2020

The 2020 tax season (for the 2019 tax year) is underway, and the Internal Revenue Service is expecting more than 150 million returns by the time it's all over. Though acting early may help prevent identity theft and fraud, the IRS still advises taxpayers to wait for official documents (W-2s, annual statements, etc.) before filing, to get it right the first time. Since 2019's Taxpayer First Act made the most comprehensive reforms to IRS procedures since 1998, it's especially important this year to do your homework and avoid confusion.

Related: 20 Valuable Tax Breaks for Seniors

Did you know you can e-file your federal tax returns for free? If not, it may be because the paid tax-preparing industry, led by TurboTax maker Intuit, has done its best to hide the IRS' Free File service on their sites from search engines like Google, as ProPublica reported last year. In response, the IRS scrapped a decades-old agreement not to create its own online filing system and barred companies from “any practice” that would exclude Free File and its partnered programs. For taxpayers with adjusted gross income of $69,000 or less, this means greater ease and clarity in preparing your taxes through Free File, including for non-federal returns in more than 20 states.

Related: 11 Cheap or Free Ways to File Your Taxes

If you've tried dipping your toes into bitcoin investments, 2020 will mark the first year you'll have to report any losses and earnings from this and other digital-age currencies. As well as halving the number of schedules from six to three, the revised Form 1040 individual income tax return requires taxpayers to maintain records of and report their virtual currency transactions under Schedule 1's Additional Income and Adjustments To Income.

Following the Bipartisan Budget Act's passage in 2018, this is the second filing season for which seniors age 65 and over have the option to use the new form 1040-SR over the traditional 1040, which takes about twice as long to complete. While following the same template, the 1040-SR allows income reporting from sources such as investment income, Social Security, and distributions from retirement plans or other deferred-payment arrangements. Working or retired seniors can either accept their extra standard deduction or itemize specific deductions, in which case they'll also have to file Schedule A.

Last year, the IRS launched Identity Theft Central to offer guidance on protecting your identity and data during tax filing season. In addition, they created an opt-in program letting taxpayers receive an Identity Protection (IP) PIN, a six-digit number adding an extra layer of protection for their Social Security numbers. Residents of 19 states and the District of Columbia who filed a federal return last year are eligible.

In December, the IRS released its first new version of Form W-4, Employee's Withholding Certificate, since the '80s, intending to simplify the process for workers to change the amount of federal tax withholding from paychecks. The biggest change is that withholding will now be based on a taxpayer's expected filing status and standard deduction, rather than marital status, number of dependents, and other personal exemptions. Employees who have filled out a W-4 in prior years need not furnish a new form just because of the redesign, but it may be worth looking into, thanks to another streamlining IRS tool…

Would you rather pay all your income tax at the end of the year, or have it withheld from monthly salaries to score a big return payout? The IRS' newly launched Tax Withholding Estimator can help you decide, using a customized refund slider to show users a range of different refund amounts based on their tax information, so they can then adjust their paycheck withholdings as necessary.

The IRS limit for pre-tax contributions to 401(k) pension plans increased slightly from $19,000 to $19,500 for tax year 2019. Stashing more away is an easy way to reduce one's taxable income while planning ahead. Taxpayers 50 and older can catch up on their retirement savings by contributing up to an additional $6,500, also a $500 increase from last year. The base contribution for an individual retirement account (IRA) similarly increased, up $500 to $6,000.

The past couple years of tax changes have seen itemized deductions increasingly fazed out in favor of higher standard deductions, and last year was no exception. For the 2020 season, the standard deduction increased $400 to $24,800 for married couples filing jointly, $200 to $12,400 for single taxpayers, and $300 to $18,650 for heads of households. The IRS also released new personal tax brackets for 2020, slightly higher to account for inflation, which can be viewed here.

Anyone with a qualified health insurance plan can store some of their savings in a health savings account (HSA), taking advantage of pre-tax deposits and tax-free withdrawals for appropriate medical expenses. This year, the amount taxpayers can stash away to deduct from their taxes increased, albeit slightly, up to $3,550 from $3,500 for individuals and to $7,100 from $7,000 for those with family plans.

The Trump administration's Tax Cuts and Jobs Act more than doubled the limit for tax exempt gifts and estate endowments, giving multimillionaire taxpayers and their descendants a little-needed break in 2020. Instead of $5.49 million before the 2017 bill's passage, estate holders can now pass on a lifetime total of $11.58 million per individual before funds are subjected to 40% federal estate and gift taxes.

Related: Why Billionaires Pay Less in Taxes

A fundamental (and controversial) component of the Affordable Care Act was its individual mandate, whereby taxpayers who didn't have health insurance or qualify for an exemption were required to pay up to 2.5% of taxable income for their noncompliance. Taking effect this year, the Tax Cuts and Jobs Act removed this penalty from annual tax returns, so anyone who went without health insurance in 2019 won't get dinged on their 2020 return.

Another tax-code change taking effect this year is elimination of the alimony deduction. For divorces finalized after 2019, divorcees paying alimony can no longer write off payments on their 2020 return, just as those receiving alimony do not need to count them as income.

Thanks to Congress extending a handful of expired tax breaks in December, taxpayers can now deduct mortgage insurance premiums (MIP) for the 2019 tax year, or retroactively apply them to their 2018 return. For any amount more than $600, these fees — generally paid by borrowers who make a less than 20% down payment on their home to protect the lender — should be reported in Box 5 of Form 1098, Mortgage Interest Statement.

Under the same law, known as the Taxpayer Certainty and Disaster Tax Relief Act, a deduction for college tuition expiring in 2017 was revived for tax years 2018 through 2020. The amount you can write off varies from $2,000 for taxpayers with gross income between $65,000 and $80,000 (or $130,000 to $160,000 for couples filing jointly), to $4,000 for earners up to $65,000 (or $130,000 for joint-filers).

While the IRS generally requires taxpayers to report canceled debts as taxable income, Congress extended an exception over the same period, applying specifically to canceled mortgage debts used to buy a principal residence. In effect, this means any qualifying cancellation of debt (COD) income up to $2 million that occurred from 2018 to 2020 won't be taxed.

Another few tax credits revived for the 2018 to 2020 tax years relate to energy-efficient purchases. For one, taxpayers can claim an income tax credit for certain energy-saving home improvements, capped at a cumulative $500 allowance (rather than an annual allowance). Electric vehicles purchased in these years are also once again eligible for tax credits, ranging from $4,000 for vehicles under 8,500 pounds and up to $40,000 for heavier vehicles.

Purchases of qualifying electric-powered motorcycles (and other two-wheeled vehicles for use on public thoroughfares) are eligible for a 10% tax credit, which can be worth up to $2,500. Finally, individuals and businesses can claim a tax credit covering up to 30% of the costs for installing non-hydrogen alternative vehicle refueling/recharging stations.

If you've inherited an individual retirement account (IRA), new laws taking effect in 2020 will require you to withdraw the total balance within 10 years. This means more taxable income and less retirement savings, potentially pushing some inheritors into a higher tax bracket. Another rule change makes it easier for Americans to keep pumping cash into an IRA well into their traditional retirement years, removing the barrier to making contributions past the age of 70½.