It’s never too early to start thinking about your tax deductions for 2020, so here is a quick rundown of what you can expect this year if you happen to invest in property.
This article is written with the intention of helping you to get the most out of a rental property by providing information on how best to avoid or take advantage of certain taxes. With all the changes that are happening in 2020, it is difficult to know what we can expect from our federal tax return at the end of next year but many things will be changing! We hope that by reading this article, you are able to learn more about how your tax matters and gain some guidance on saving money through deductions for both 2020 and beyond.
Here is a brief overview of some of the tax law changes that you can expect in 2020:
Increasing the Standard Deduction- One of the biggest changes for those who are self-employed is to increase the standard deduction. This deduction will go from $8,000 to $10,400 for those who are single and from $18,000 to $24,800 for married couples. In order to use this deduction, you need to opt out of using deductions such as rental property or big-ticket investment purchases or sales.
Increased Child Tax Credit- The Child Tax Credit is a credit against income tax that can be claimed for children under 17 on your tax return if they have lived with you during the year. There is a $2,000 credit for each child. For those who claim an additional personal exemption, the greater of these two amounts would be subtracted from the $2,000.
New Retirement Income Limits- The retirement income limits will change as well! The amount of taxable income that goes into calculating Social Security benefits will increase to $127,200 for singles and $194,400 for married couples in 2020. This way you will avoid having to take out a loan to cover your expenses while trying to save up enough money to retire. Also with this change, you might have less income to claim standard deductions and make sure your deductions are correct on your tax return.
Tax Reforms- As of January 1, 2014, the first step of the Tax Reform Act of 1986 took effect. This took away deductions for personal exemptions and set a different phaseout value for itemized deductions than before. Also, the phase out rate for itemized deductions increased from 10% to 28%. One way that people were able to avoid this was by using disregarded property such as rental property or vacation homes instead of purchasing them to be claimed as an itemized deduction. These changes will take place in 2020 where the exemption amount will increase from $3,650 to $4,650 and all exemptions will be phased out at a rate of 23% regardless if you are single or married filing jointly. This way, you will not have to make a significant change in the way you claim your deductions if you live in a home that has the potential for rental income. This applies to all real estate including vacation homes, rental property, and even second homes. If this is something that you plan on doing, then we recommend contacting your tax software provider early and asking about any updates before year-end.
Increased Tax Rate on Short Term Capital Gains- The greatest change to the 2020 tax return will be the Tax Cuts and Jobs Act of 2017 (also known as TCJA). This new law greatly changes how capital gains are calculated for 2019 but it also affects future tax years. One of the biggest changes is that the maximum rate for short term capital gains will be lowered from 20% to 23.8% in 2020. This way, you will avoid having to pay more taxes on your short-term capital gains. Also, in 2019 and beyond the long-term capital gains rates at which 45% apply will increase to 20% in 2020 and beyond. This means you’ll pay a higher rate when you sell investments that have been held for longer periods of time and have increased in value since purchase.
Increased Alternative Minimum Tax- The AMT is a parallel tax system that essentially adds up income and expenditures for those who might not be able to take advantage of all the deductions that are allowed by the regular tax system. This tax was originally designed to make sure that those who received monetary gifts or bequests from wealthy family members would have to pay taxes on these amounts given on a separate return. It also made sure that people who could have paid taxes but did not would have to pay a minimum amount of taxes. The AMT exemption amount was increased in 2018 from $70,300 to $80,300 for married couples filing jointly and from $54,700 to $70,300 single filers. The phaseout amount was increased in 2018 from $70,300 to $77,600 for married couples filing jointly and from $54,700 to $61,800 for single filers. For 2018 through 2025 the exemptions were set at $1 million and the phase-out range was also increased slightly. The amount of income that is subject to the AMT will increase by about 6% in 2020.
Tax Rate Itself Will Increase- One of the more controversial aspects of the TCJA is that tax rates themselves will increase to pay for all the tax cuts (which we assume they will). This means that you will see your tax rate raise from 37% to 48.6%. Depending on how much you earn and whether you have certain exemptions or deductions, you might be able to take advantage of certain changes such as the Child Tax Credit or Child Care Credit and the refundable portion of the Earned Income Tax Credit. You should check with a tax advisor to see if these new offsets will be good for you at year-end 2020.
The Bottom Line
With all of these changes, there is a good chance that taxpayers will need to amend their tax return once they receive it by filing an amendment with their current tax software provider. If you want to make sure that your taxes are done properly, we recommend filing an amendment using a provider who has experience in doing amendments in 2019 and previous years.
If you want to lock in your current tax savings, then it is important to file your taxes as soon as possible. Also, if you have any other questions about filing an amendment or filing a return for 2019 we recommend calling or emailing your current tax software provider because they are the best source for help.
If you are looking for a new software provider for year-end 2020 and beyond, we recommend talking with a professional tax advisor who knows their way around the new tax code and can help select the right tax software solution.
This is all about tax deductions that you would want to know if you are looking to invest in a property. Though if you need professional help or guidance on the same, then you can seek guidance from Better Capital and get the best guidance from them. short-term.
For more information, you can visit Real Estate Calculators.
