As a new year begins, it’s a great time to explore how that might affect your paycheck. That is especially key since the new year also represents new changes related to the Internal Revenue Service (IRS) and Social Security Administration (SSA).
Courtesy of a robust economy, 2019 saw sweeping changes to contribution limits for retirement savings that appear to carry over into 2020, Changes in these regulations can have a substantial impact on the amount of money you bring home each week.
Now is an excellent time to explore these changes to see how your monthly income will change as a result and what, if any, changes you need to make to account for your new budget reality.
These are a few of the changes that might affect your income in 2020.
Defined contribution plans: Defined contribution plans, such as 401(k), 403(b), most 457(b), and the federal Thrift Savings Plan, limits have seen a steady increase over the past three years from a maximum pre-tax contribution of $18,500 in 2018 to $19,000 in 2019, and $19,500 in 2020.
Individual retirement accounts: IRA contribution limits remain steady in 2020 at $6,000 annually. If you are an investor aged 50 or older, you may make “catch-up” contributions. The limit on those remains static at $1,000, offering a total IRA investment of $7,000 annually for those who qualify for the catch-up payments.
Defined benefit payment plans: These plans are enjoying yet another year of positive numbers with an increase from $220,000 in 2018 to $225,000 in 2019 and $230,000 in 2020.
Social Security: Social Security benefits credits increase in 2020 by $50. That represents an increase in dollars earned from $1,360 in 2019 to $1,410 in 2020. The Retirement Earnings Test limits (the amount of money you can earn through employment without adversely affecting your Social Security benefits) has increased from $17,640 or $1,470 per month in 2019 to $18,240 or $1,520 per month in 2020. Those reaching full retirement age in 2020 will enjoy increased maximums of $4,050 per month of $48,600 per year in 2020 compared to $3,910 per month or $46,920 per year in 2019.
Social Security taxes: Social Security taxes are increasing significantly this year, up to 15.3 percent for the self-employed and 7.65 percent for employees, from 12.4 percent for the self-employed and 6.2 percent for employees in 2019. Employees will pay Social Security taxes on their income up to the maximum amount of $137,700 in 2020, an increase over 2019’s maximum of $132,900.
Social Security benefits: Those who receive Social Security benefits will enjoy a modest cost of living adjustment (COLA) of 1.6 percent for 2020, which is much lower than the 2.8 percent COLA in 2019 and only slightly smaller than the 2.0 percent COLA in 2018.
Medicare tax: Medicare taxes for 2020 remain unchanged at 1.45 percent. Higher earners will pay higher rates according to the mandates of the Affordable Care Act, which requires high earners (earners making more than $200,000 or $250,000 when filing jointly) to pay an addition 0.9 percent in Medicare taxes. These numbers are the same as in 2019 and 2018.
Standard deductions: The standard deductions for married couples filing jointly increases to $24,800 for married couples filing jointly, an increase of $400 over 2019. Single payers and married couples filing individually enjoy an increase of $200 over last year’s rates with a new deduction rate of $12,400. Heads of the household enjoy a standard deduction of $18,650 – an increase of $300 over 2019.
Flexible spending accounts: The maximum contribution limit for medical flexible spending accounts has increased by $50 over 2019 with a new annual limit of $2,750.
Adoption credit: The maximum credit for child adoption has increased to $14,300 in 2020 from $14,080 in 2019. That is the amount employees can offset from their incomes to help offset some costs involved in adopting a child. It represents an increase of $220 over 2019.
Each year, tax codes change, representing the need for new considerations when planning budgets, deductions, and living expenses for the coming year. The better you understand these upcoming changes, the better you can prepare for the new financial realities you and your household will need to consider. This guide can be instrumental in helping you manage your paycheck planning for 2020, so you can be prepared for potential shortfalls and adjust accordingly.