Breanna Oakley, Brown Armstrong CPAs
New year, new (updated) laws! At least for the 2020 tax year, there are nowhere near as many changes to the tax code as those implemented by the Tax Cuts and Jobs Act.
Each year key tax calculation amounts automatically adjust for inflation. The income thresholds for each tax bracket increased which means you will pay less tax in 2020 for the same amount of income that you reported in 2019. The standard deduction also increased to $12,400 for singles and married filing separately, $18,650 for head of household, and $24,800 for married filing jointly filers.
There are also small increases related to retirement account contribution limits. If you are one who likes to maximize your 401(k) contributions each year, you can contribute up to $19,500 in 2020, which is up $500 from the prior year. The catch-up 401(k) contribution increased to $6,500 for those who are 50 years old or older.
Unfortunately, the contribution limits remain stagnant for those who have a traditional or ROTH IRA. The maximum contribution will remain at $6,000 unless you are 50 years or older as you can make a $1,000 catch up contribution.
The lifetime estate and gift tax exemption increased to $11.58 million per individual, which is up $180,000 from 2019. The allowed lifetime exemption more than doubled in 2018 due to the Tax Cuts and Jobs Act, but this increase is not permanent. The exemption will revert to the prior amount of $5.49 million in 2026 unless Congress extends the law with the higher limit. The IRS announced that when the exemption amount reverts to $5.49 million that they will allow those who made gifts in excess of $5.49 million but less than the $11.58 million to be excluded from the taxpayer’s estate. For those with an estate value that is in excess of the lower exemption, now is the time to review your estate plan to determine if you should take advantage of this temporary increase.
If you have been toying with the idea of purchasing a solar system for your home or business property, you may want to consider purchasing one before the end of 2020. For solar systems that are placed in service before 2021, the tax credit is 26% of the cost, which is a four percent drop from 2019. Time is of the essence to maximize this credit as the value of the credit is scheduled to phase down each year until 2022.
The hottest topic of 2020 does not affect everyone but it is a major change for California businesses. Starting at the beginning of 2020 a new test that was result of a 2018 California Supreme Court decision and later codified by California Assembly Bill 5 (“AB 5”), must be followed in determining the status of a worker. The newly adopted test is a three-part test that is referred to as the ABC test. The conditions set forth by the ABC test created a narrower definition for independent contractors than the prior Borello test. For a worker to be classified as an independent contractor the relationship must satisfy all the conditions below:
A. The worker is free from the control and direction of the hiring entity in performing the work, both in contract and in fact;
B. The worker performs work that is outside of the usual course of the hiring entity’s business;
C. The worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
As with most laws, there are many exemptions to AB 5 but they are occupation-specific. It is crucial for California business owners to take the time to become familiar with this law, as the costs of misclassification are steep. For workers that are determined to be misclassified as employees, the business is liable for all unpaid withholding taxes, employer payroll taxes, penalties and interest. If the Labor Commissioner or court determine the misclassification was willful, a civil penalty of $5,000 to $15,000 for each violation can be assessed. If the Labor Commissioner or court determines there is a “pattern of practice” of these violations, it can assess a penalty of $10,000 to $25,000 per violation. Every business owner in California who hires independent contractors should reassess their relationship with these workers. If in doubt, call a local labor attorney for advice.
In the grand scheme of things, the tax code did not drastically change for the 2020 tax year when compared to 2019. However, 2020 is an election year so things can still change. Stay tuned!