Federal Income Tax Guide for 2020 [for 2019 Tax Prep]

Even though the 2020 income tax season is still several months away, and the details of filing 2019 tax returns are still being worked out by the IRS, it’s never too early to be prepared in advance.tax guide 2019

To prevent any surprises between now and then, we’re providing this 2020 federal income tax guide to prepare your 2019 tax return. But we need to warn you upfront that this information is preliminary.

It’s summarized from the IRS’s 1040 and 1040-SR Instructions booklet, which was issued on October 10. Even the IRS includes the following disclosure in the booklet – in red: Caution: DRAFT – NOT FOR FILING. Please keep that in mind as we move forward.

This guide will include a very generous number of backlinks to IRS sources since many provisions of the tax code are too complicated to be described in a limited number of words. We hope you’ll pardon the distractions the backlinks can create!

With that information in mind, use this guide only for informational purposes. We’ll be updating it once the new tax guidelines for 2019 are official.

Do You Need to File a Tax Return?

You hear it all the time, “how much do I have to make to file taxes?” and the thing is, millions of people may not be required to file a tax return at all. The general thresholds – which match the standard deduction for each taxpayer category – are presented below.

If you earn less than these amounts, it’s likely you won’t need to file at all. However, there are exceptions, which we’ll detail as well.

If you earn less than these amounts, you likely won’t have to file taxes:

  • Single, under 65: $12,200
  • Single, 65 or older: $13,850
  • Married filing jointly, both spouses under 65: $24,400
  • Married filing jointly, one spouse 65 or older: $25,700
  • Married filing jointly, both spouses 65 or older: $27,000
  • Married filing separately, any age: $12,200
  • Head of household, under 65: $18,350
  • Head of household, 65 or older: $20,000
  • Qualifying widow(er) with dependent child, under 65: $24,400
  • Qualifying widow(er) with dependent child, 65 or older: $25,700

You will still need to file a tax return if any of the following apply:

  • You had at least $400 in net earnings from self-employment. This includes freelancers, people with side businesses, and anyone who participates in gig work. You’ll need to file because you may owe the self-employment tax, even if you owe no federal income tax.
  • You owe household employment taxes for domestic employees.
  • If for any reason you may be subject to the alternative minimum tax.
  • You may owe an additional tax on a distribution from a retirement plan.
  • Social Security and Medicare taxes owed on unreported tip income, or wages you received from an employer who didn’t withhold these taxes.
  • You received a distribution from a medical savings account (MSA) or a health savings account (HSA).
  • You received an advance payment on the Premium Tax Credit for health insurance obtained from an ACA marketplace. You’ll know this if you receive IRS Form 1095-A or IRS Form 1095-B showing the amount of advance payments.
  • You are required to include amounts in income under section 965 or you have a net tax liability under section 965 that you are paying in installments.
  • You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare tax.

If you have any questions about whether or not you’re required to file a return, be sure to consult your tax preparer. Although many tax preparation software packages can guide you through the process and let you know.

Choosing Your Tax Filing Status

IRS regulations allow you to choose one of five basic filing statuses:

Married Filing Jointly (MFJ)

For most married couples, this will be the filing status that will produce the lowest tax liability. You’re eligible for married filing jointly if you are married as of December 31, 2019.

Married Filing Separately (MFS)

Not only will this filing status generally result in a highest tax liability, but you’ll also lose certain deductions and benefits as a result of claiming it. But it’s sometimes an advantage if there’s an imbalance in either income or deductions. For example, when one spouse has a much higher income than the other, or much higher itemized deductions than the other.

Head of Household (HOH)

To meet the head of household requirements, you must be a single taxpayer, legally separated, or your spouse didn’t live with you during the second half of the tax year. To qualify for the status, you must have a qualifying child or dependent for whom you paid at least half of their support.

If you’re married, you may need to have supporting documentation available to claim the status. Documentation includes a separation agreement, evidence you and your spouse resided in separate homes, and evidence you provided more than half the support of one or more claimed dependents. You don’t have to file it with your tax return, but you may need it if you’re audited or the IRS questions your claim.

Single

This will be your tax filing status if you are not married or legally separated as of December 31, 2019.

Qualifying Widow(er)

You are eligible to claim this filing status in a) the year in which your spouse died, and b) the following year. It will preserve your tax benefits under married filing jointly for the affected years. To qualify, you must have a qualifying dependent.

Should You Prepare Your Own Return or Hire a Professional?

I hope you’re not preparing your tax return the old-fashioned way, by filling out paper tax forms. Tax preparation has evolved rapidly in recent years and provides professional results for a fraction of the cost of paying a tax preparer.

Three of the most popular tax software plans available include:

Each software program offers several different packages at different price levels, to accommodate various tax situations. You can pay a small flat fee to prepare and file a simple tax return, or pay a premium price for a more complicated return. TurboTax and H&R Block even offer live preparer assistance in case you reach a point where you need help.

But if you have a particularly complicated return, you may want to use a professional tax preparer. The best choice will be either a certified public accountant (CPA) or an enrolled agent (EA).

A CPA is a licensed accountant, and the best choice if you have a particularly complicated return. This may be the case if you are self-employed with a large business, own numerous investment properties, or have complicated business dealings.

Enrolled agents aren’t accountants, but tax preparation specialists. They are licensed to represent their clients before the IRS. They charge lower fees than CPAs, and are best used if your return is difficult, but not in the really difficult category.

Preparing to Do Your Income Tax Return

Tax preparation is actually a simple process for most taxpayers. That is, as long as you have all your documentation available. Then it’s just a matter of transferring the information from your documentation to your tax return. Tax software programs and paid tax preparers handle all the technical details for you.

But that will only be possible if you have complete information available in advance. There’s potentially a lot of documentation required, so let’s break it down by category.

Basic Information

This is the information all taxpayers are generally required to have available.

  • Social Security numbers for each member of your household, including and especially dependents
  • Complete copies of the prior year’s income tax returns, which will be needed to provide any carryforward information
  • Income information for your dependent children
  • If you plan to take a home office deduction for your business, you’ll need the square footage of the entire house, as well as the square footage for the space in your home dedicated to your business activities.
  • If you receive or pay alimony or child support, you’ll need your ex-spouse’s Social Security number
  • Marketplace exemption certificate, if you received an exemption from your state’s health insurance exchange

Income Documentation

  • W2s from any employers you worked for during the year
  • 1099-MISC for additional income for which income taxes were not withheld (includes contract and freelance income)
  • 1099s reporting Social Security or pension income, interest and dividends received, IRA or annuity income distributions, state income tax refund or unemployment insurance, or reporting the sale of stock or other securities
  • K-1’s reporting partnership or S-Corporation income
  • W-2G reporting gambling winnings, as well as records supporting gambling losses
  • Documentation of alimony received, including the social security number of the payee
  • If you’re self-employed, a complete accounting of all your business income
  • If you own investment real estate, documentation of rental income received

Potential Tax Deductions

Deducting expenses on your income tax return has become less doable since the 2017 income tax revisions. Since standard deductions are now double what they used to be, far fewer people will be able to itemize deductions. But just in case you can, below is a list of documents you may need to prove your deductions.

Documents Needed to Prove Tax Deductions:

  • 1098 reporting mortgage interest and property taxes paid, educational expenses, and student loan interest paid
  • 1095-A, 1095-B, or 1095-C, reporting health insurance premiums paid, and to whom
  • The many different forms 5498 reporting IRA, HSA or ESA payments made during the year
  • Letters from charities reporting contributions, or other evidence supporting contributions made during the year

Evidence of deductible expenses won’t always come neatly on IRS forms. In many instances, you’ll need to supply your own documentation. Not all will apply to you, but use this list as a reminder for those that do.

Personal Documentation Needed to Prove Deductible Expenses:

  • Federal and state estimated tax payments made for the tax year
  • Property taxes paid but not reported on Form 1098 by a lender (usually necessary if you own property not encumbered by a loan)
  • Cost basis of investments sold (if the information is not provided by a broker)
  • Charitable contributions made but not reported by the receiving organization
  • Documentation of all self-employment related expenses
  • Expenses for rental property
  • Documentation for the purchase of depreciable assets for business or investment activity
  • Indirect expenses related to investment activity
  • Evidence of payment of health insurance, out-of-pocket medical, dental and vision expenses, medical mileage and long-term care insurance
  • Cost of preparation of last year’s income tax returns
  • Sales tax paid on major purchases
  • Childcare expenses paid, if not supplied by the provider (including the provider’s tax ID number)
  • Documentation of alimony paid (if under a divorce decree finalized no later than December 31, 2018)
  • Receipts from the purchase of energy efficient equipment installed in your home
  • Mileage driven for business, employment, medical or charitable activities, as well as records of payment for tolls, parking and ad valorem taxes
  • Wages paid to a domestic care provider, including that provider’s tax ID number
  • An itemized list of higher education expenses paid out-of-pocket, with documentation supporting each

Federal Income Tax Rates for 2019 – PRELIMINARY!

The table below shows the anticipated federal income tax rates and brackets for the 2019 tax year:

Filing Status: Single

Tax BracketSingle
10%$0 to $9,700
12%$9,700 to $39,475
22%$39,475 to $84,200
24%$84,200 to $160,725
32%$160,725 to $204,100
35%$204,100 to $510,300
37%Over $510,300

Filing Status: Married Filing Jointly or Qualifying Widow

Tax BracketMarried Filing Jointly
or
Qualifying Widow
10%$0 to $19,400
12%$19,400 to $78,950
22%$78,950 to $168,400
24%$168,400 to $321,450
32%$321,450 to $408,200
35%$408,200 to $612,350
37%Over $612,350

Filing Status: Married Filing Separately

Tax BracketMarried Filing Separately
10%$0 to $9,700
12%$9,700 to $39,475
22%$39,475 to $84,200
24%$84,200 to $160,725
32%$160,725 to $204,100
35%$204,100 to $306,175
37%Over $306,175

Filing Status: Head of Household

Tax BracketHead of Household
10%$0 to $13,850
12%$13,850 to $52,850
22%$52,850 to $84,200
24%$84,200 to $160,700
32%$160,700 to $204,100
35%$204,100 to $510,300
37%Over $510,300

2019 Tax Changes from 2018

The following changes have taken place since the 2018 tax year, and are effective for 2019:

Mileage Allowances Increased for 2019

The mileage allowances for 2019 are as follows:

  • Business Mileage: 58 cents per mile
  • Charitable Mileage: 14 cents per mile
  • Medical and Moving Mileage: 20 cents per mile

The Elimination of the Affordable Care Act Penalty

The penalty for not having health insurance coverage under the ACA has been eliminated for the 2019 tax year and beyond.

The Elimination of the Tax Consequences of Alimony

It remains deductible by the payor, and taxable to the recipient under divorce decrees issued before December 31, 2018. But it will cease to be a tax factor for divorce decrees effective after December 31, 2018.

For those later divorce decrees, it will be neither taxable to the recipient nor tax-deductible for the payor.

Higher Medical Expense Deduction Threshold

If you can itemize your deductions, unreimbursed medical expenses that exceed 10% of your adjusted gross income will be deductible in 2019. The threshold was 7.5% of adjusted gross income in 2018.

Increased Income Thresholds for the Alternative Minimum Tax (AMT)

The AMT is a special tax provision designed to prevent high income taxpayers from avoiding taxes through tax breaks. Those breaks can be either preferential income sources or excessive deductions. A higher tax rate applies to your income with the preference items added back.

The increased income thresholds for 2019 are as follows:

  • Married filing jointly and qualifying widow(er): $111,700 (exemption phase-out begins at an income of $1,020,600).
  • Married filing separately: $55,850 (exemption phase-out begins at an income of $510,300).
  • Single: $71,700 (exemption phase-out begins at an income of $510,300).

Other Tax Provisions You Need to Be Aware of for 2019

There are certain provisions in the tax code that may not apply to you – or may not have applied in the past – that you need to be aware of.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax, or NIIT is funding provision of the Affordable Care Act enacted in 2010. The NIIT extends the Medicare tax at a rate of 3.8% to investment income for those with certain high-income levels.

If your adjusted gross income exceeds the limits shown below, the tax will be applied to your investment income. Investment income sources include interest and dividends, capital gains, net income from rents, royalties, and annuity income, as well as any passive income derived from your trade or business.

The NIIT income thresholds for 2019 are unchanged from 2018:

  • Married filing jointly or qualifying widow(er) with dependent child: $250,000
  • Married filing separately: $125,000
  • Single or head of household: $200,000

“Kiddie Tax”

If your child has unearned income, it may be subject to federal income tax. If it is, it’ll be taxed at the child’s rate, not the parents (as has been the case in the past). This is commonly referred to as the “kiddie tax”.

The lower tax rate applies if the child is either under 19 years old, or under 24 years old and a full-time student.

It works like this:

  • The first $1,050 in unearned income by the minor is tax free
  • Above $1,050 in unearned income is taxed at the child’s rate, not the parent’s rate

Debt Forgiveness Income

If you failed to pay a debt, and it’s written off by the lender, you may incur a tax liability. The IRS considers this to be debt forgiveness income, and it’s fully taxable for federal income tax purposes.

For example, let’s say you default on a car loan and there’s a loan deficiency of $5,000 after the lender repossess the vehicle and sells it to satisfy the debt. The lender can issue IRS Form 1099-C, Cancellation of Debt, reporting the amount of the unpaid debt. You will then need to declare that on your income tax return, where it will be taxed as regular income. If your marginal income tax rate is 12%, you’ll pay $600 in federal income tax ($5,000 X 12%) for the year to which the 1099-C applies.

Debt cancellation income does not apply if the debt is discharged in bankruptcy, or if the lender continues to pursue payment on the loan, such as by obtaining a court judgment or lien.

Itemized Tax Deductions

Personal Exemptions

As was the case in 2018, personal exemptions – where you can deduct a flat amount for yourself, your spouse, and your dependents – no longer exists. 2017 was the last year personal exemptions applied.

For 2018 in subsequent years, the personal exemption has been eliminated, and the standard deduction substantially increased.

The Standard Deduction for 2019

For 2019, the standard deduction is as follows

  • Single, under 65: $12,200
  • Single, 65 or older: $13,850
  • Married filing jointly, both spouses under 65: $24,400
  • Married filing jointly, one spouse 65 or older: $25,700
  • Married filing jointly, both spouses 65 or older: $27,000
  • Married filing separately, under 65: $12,200
  • Married filing separately, 65 or older: $13,850
  • Head of household, under 65: $18,350
  • Head of household, 65 or older: $20,000
  • Qualifying widow(er) with dependent child, under 65: $24,400
  • Qualifying widow(er) with dependent child, 65 or older: $25,700

If your income exceeds the above thresholds, you’ll be eligible to itemize your deductions. Allowable itemized deductions include mortgage interest, charitable deductions, certain medical expenses, and state and local income taxes, as well as real estate and sales taxes.

There Is No Longer a Phaseout For Itemized Deductions

The phase-out for itemized deductions that used to apply to high income taxpayers has been eliminated for 2018 and subsequent years.

That means your itemized deductions will no longer be reduced or eliminated if your income exceeds certain limits.

Mortgage Interest

Mortgage interest is deductible, but how much you can deduct depends on when the financing was incurred.

For mortgages taken out prior to December 15, 2017, you can deduct the interest on mortgage indebtedness totaling up to $1 million if you’re married filing jointly. For married filing separately, interest is limited to debt paid on indebtedness not to exceed $500,000.

For mortgages taken out after December 15, 2017, the debt limit is $750,000 if you’re married filing jointly, and $375,000 if you’re married filing separately.

State and Local Income, Real Estate and Sales Taxes

Any of these taxes continue to be deductible, however, there is a ceiling on how much you can deduct. If you’re married filing jointly, the total deduction for all taxes is limited to $10,000. If you’re married filing separately, the limit is $5,000.

The $10,000 limitation will naturally fall hardest on those who live in states with high income tax rates or in localities with high property taxes, or both.

Medical Expenses

As noted earlier, medical expenses are deductible to the degree that they exceed 10% of your adjusted gross income.

For example, if you have an adjusted gross income of $100,000, you’ll be able to deduct medical expenses to the degree they exceed $10,000, which is 10% of $100,000. If you have $15,000 in tax-deductible medical expenses during the course of the year, you’ll only be able to deduct $5,000 of them. And of course, you’ll need to itemize deductions to do that.

Deductible medical expenses include the following:

  • Deductibles and copayments
  • Other out-of-pocket costs, such as coinsurance payments or other costs not covered by health insurance
  • Premiums paid for health insurance and long-term care insurance, not part of an employer plan
  • Prescription medications not covered by insurance (includes copayments)
  • Medically necessary travel expenses, including medical mileage (at 20 cents per mile)
  • Payments for participation in a weight loss program prescribed by a physician for a disease, including obesity
  • Costs incurred for reading or prescription eyeglasses, contact lenses, hearing aids, crutches, wheelchairs, false teeth, and a guide dog for someone who is visually or hearing impaired.

Health Savings Accounts (HSAs). If you are unable to itemize on your tax return, you can still get a deduction for medical expenses paid. By setting up an HSA account through a bank or credit union, you can make tax-deductible contributions, then pay your medical expenses out of the account.

For 2019, you can contribute up to $3,500 for an individual plan, and up to $7,000 for a family plan. You can also make an additional contribution of $1,000 if you are 55 or older. Any funds contributed to the plan that are not spent during the year can be rolled forward into future years.

Charitable Contributions

If you itemize on your return you can deduct contributions made to tax-exempt charities. These include houses of worship, schools, and other recognized charities. There’s no limit on how much you can contribute overall or to any individual charity (however if your contributions are considered excessive in relation to your income, the IRS may require you to document your contributions).

In most cases, the charitable organization will issue you a year-end statement confirming the amount of your contributions. If they don’t, you can substantiate your contributions using canceled checks, bank statements, or credit card statements. You don’t need to submit these to the IRS with your return, but you should have them available in case they’re requested.

You can also deduct non-cash contributions. These can include clothing and other household items donated to organizations such as American Kidney Association, American Cancer Society or Goodwill. Typically, when you make non-cash contributions to various organizations they provide you with some type of receipt. However, you’ll generally need to indicate on the receipt the items contributed and the estimated value.

The IRS gives you several ways to value non-cash contributions, the most typical of which is what’s known as the Thrift Shop Value. This can be done on up to $500 worth of merchandise contributed. However, if you exceed $500, you’ll need to file IRS Form 8283, Noncash Charitable Contributions.

Miscellaneous Itemized Deductions No Longer Permitted

Up until the 2017 tax year, you could deduct various miscellaneous expenses if you itemized on your return. These included moving expenses, job-related expenses, job-hunting expenses, and other miscellaneous deductions.

But as of 2018 and subsequent years, the tax code no longer provides for miscellaneous deductions.

There are however two exceptions:

  • Work-related education expenses. You can deduct the cost of tuition, books, supplies, lab fees, certain transportation and travel costs, and other educational expenses. However, those costs must be to acquire skills to either maintain or improve your job performance. They are not deductible if they are incurred for education costs designed to move you into a different career.
  • Casualty, disaster and theft losses. You can deduct these losses related to your home, household items, and vehicles, due to a federally declared disaster area by the President. You can only deduct those expenses that are either not covered by insurance, or exceed the insurance reimbursement. This is a complicated topic, so we recommend you consult Topic No. 515 Casualty, Disaster, and Theft Losses issued by the IRS.

Retirement Plan Contributions

One of the best ways to get a substantial tax deduction – without needing to itemize your deductions – is by contributing to a tax-sheltered retirement plan.

Traditional IRAs (Roth IRA contributions are not tax-deductible)

You can contribute up to $6,000 per year to a traditional IRA, or $7,000 if you are 50 or older. Contributions must be made no later than April 15 after the tax year in question. If neither you nor your spouse are covered by another retirement plan, the full contribution amount will be tax-deductible.

Income limits apply if either you or your spouse are covered by another retirement plan. Be sure you’re aware of those limits before making an IRA contribution.

401(k), 403(b), 457 and TSP plans

You can contribute up to $19,000 per year, or $25,000 if you’re 50 or older, to any of these plans. Your contribution will be fully deductible for income tax purposes, but all contributions to the plan must be completed by December 31 of the subject tax year.

SIMPLE IRAs

This is basically an IRA plan with much higher contribution limits. This type of IRA is available for both employees and self-employed individuals. Maximum annual contributions are $13,000, or $16,000 if you are 50 or older.

SEP IRAs

This is an IRA plan designed specifically for the self-employed. You can deduct up to 25% of your business income, up to a maximum of $56,000.

Tax Credits

Unlike tax deductions, which lower your taxable income before calculating your tax liability, tax credits are a direct reduction of your tax liability. For example, a $2,000 tax credit can reduce a $10,000 tax liability to $8,000. For this reason, tax credits are often more valuable than tax deductions.

There are two types of tax credits, refundable and nonrefundable. A refundable tax credit is one in which you will receive a credit even if you owe no income tax. A nonrefundable tax credit is one that will reduce your overall tax liability, but is also limited to your liability. Put another way, a nonrefundable tax credit will not reduce your tax liability below zero.

The IRS offers many different tax credits. But some of the more popular ones include the following:

Earned Income Tax Credit (EIC)

The earned income tax credit is perhaps the most popular tax credit, and is designed specifically for low income taxpayers. The credit is refundable, so you can receive it even if you have no tax liability. Income limits apply, but the credit can be worth several thousand dollars.

Child Tax Credit

You can get a credit of up to $2,000 per dependent child under the age of 17 at the end of the tax year. The child tax credit begins to phase out if you have an income of $200,000, or $400,000 if you’re married filing jointly.

Child and Dependent Care credit

The child and dependent care credit applies to dependents under age 13. It’s also available for the care of a spouse or dependent of any age who is incapable of taking care of themselves. It provides a credit of up to 35% of the qualifying expenses, based on adjusted gross income.

Education Credits

The tax code provides several education related credits for students, including the American Opportunity Tax Credit (worth up to $2,500) and the Lifetime Learning Credit (worth up to $2,000). You can investigate either if you are a student.

Retirement Savings Contribution Credit

If you make contributions to a retirement plan, and your income is within specified limits, you’ll be eligible for the retirement savings contribution credit. It can be worth up to $2,000 for single taxpayers, and up to $4,000 for those who are married filing jointly.

Filing Income Taxes for the Self-employed

Millions of people are self-employed, as business owners, subcontractors, and freelancers. If you’re one of them, you’ll need to file your income tax return, just as W-2 employees do. The difference is that you will likely need to file IRS Form Schedule C, Profit or Loss from Business (Sole Proprietorship) with your return.

You’ll need to include income received from any business source. Depending on the type of business you have, you might receive 1099 forms, or cash income directly from customers. Whatever the source, it will need to be included as gross income on Schedule C.

But being self-employed, you’ll also have a substantial number of expenses you can deduct against that income before calculating your taxable income. As a business owner, you’ll need to keep records of all expenses paid throughout the year. This documentation may be required if you’re ever audited by the IRS.

Examples of allowable business expenses (but are not limited to):

  • Inventory (if you have a product-based business)
  • Wages paid to employees, if any
  • Payments made to third-party contractors
  • Rent expense, or business use of your home
  • Business related use of your car
  • Costs and expenses of equipment purchased for your business*
  • Sales, marketing and advertising costs
  • Legal and professional fees
  • Business insurance premiums paid
  • Interest on business-related loans
  • Travel expenses for business purposes
  • Meals and entertainment (subject to a 50% limit)
  • Phones and Internet costs
  • Postage and delivery costs
  • Miscellaneous office and business expenses

*(Note: you can deduct up to $1 million paid for business equipment under Section 179 depreciation in the year of purchase)

As mentioned earlier, your taxable business income will be your gross revenue, minus your allowable business expenses.

The Self-Employment Tax

If you have income from self-employment, your net business income will be subject to the self-employment tax. Essentially, this is the FICA tax for the self-employed.

If you are a W-2 employee, the FICA taxes 7.65% of your income, up to a maximum income of $132,900 for 2019. But what many employees aren’t aware of is that their employer pays a matching tax, which is also 7.65%. The total of the two is 15.3%.

But if you’re self-employed, you’ll pay both sides of that tax, or 15.3% of your net income.

The IRS gives you a bit of a break by allowing you to reduce your net business income by the employer portion of the tax. For example, if your net business income is $100,000, you can deduct $7,650 (7.65%) from your net income before calculating the tax. The 15.3% will then be calculated based on the reduced income of $92,350.

The net self-employment tax will be $12,006. However, the IRS gives you one more break. They allow you to deduct half the self-employment tax against your ordinary income. In this case, you would be able to take a deduction of $6,003 against your total income before calculating your federal income tax.

Also be aware that the Medicare portion of the self-employment tax has no income ceiling. While the total self-employment tax of 15.3% will stop at a net income of $132,900, the Medicare portion – which is 2.9% – will apply to all self-employment income above that threshold.

Additional Ways to Reduce Your Self-Employment Income

Once you calculate your net business income, there are other deductions you can take that will reduce your taxable income for federal tax purposes. Unfortunately, these will not reduce your income for the calculation of the self-employment tax.

One of the best is making a retirement plan contribution. As mentioned earlier in this guide, you can make a contribution of as little as $6,000 with a traditional IRA, or as much is $56,000 with a SEP IRA.

You should also be aware that you can deduct premiums paid for health insurance, as well as for long-term care insurance premiums, though these have specific dollar limits.

Qualified Business Income Deduction

This provision will apply only if you are self-employed, and meet certain income limits. The provision allows small businesses to deduct up to 20% of their qualified business income, plus 20% of qualified real estate investment trust dividends, and qualified publicly traded partnership income.

The deduction phases out based on the following income limits for 2019:

  • Single: $160,700
  • Married filing jointly: $321,400
  • Married filing separately: $160,750

The complete phaseout of the deduction occurred after an additional $50,000 for singles and $100,000 for married filing jointly in 2018. The IRS is not yet released the complete phaseout limit for 2019.

Whatever you do, don’t assume the deduction will be equal to 20% of your net business income. Certain non-business deductions will reduce your net business income before the qualified business income deduction is applied.

If you are self-employed, and believe you will be qualified for this deduction, you’ll need to use either a paid tax preparer or a tax software program specifically for the self-employed.

Paying Estimated Taxes on Self-employment Income

Since as a self-employed person you don’t have income tax withheld from your pay, you’ll need to make estimated tax payments. If you’ve been self-employed for at least a couple of years, your estimated tax payments will be based on your previous year’s tax liability. But if your business is new for 2019, you’ll need to make reasonable estimates of your net income and tax liability, based on your income and expense records.

Estimated tax payments are due on the following schedule:

  1. April 15
  2. June 15
  3. September 15
  4. January 15 of the following year

You can make your quarterly payments the old-fashioned way, using form IRS 1040-ES, Estimated Tax form and mailing it with a check payable to the United States Treasury.

But by far the easier way is directly through the IRS website, using IRS Direct Pay. If you go this route, you can either pay using a credit card, which will include a small fee, or by paying directly through your bank account. If you use the bank account method, there’ll be no fee.

What is the Tax Filing Deadline for 2019 Income Tax Returns?

Your 2019 income tax return must be filed by April 15, 2020. However, if you are unable to file by that deadline, you can apply for an automatic six-month extension through October 15, 2020. You can do this by filing IRS Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.

Points To Be Aware of Should You File For an Extension:

  1. The extension is automatic with the filing of Form 4868. You don’t need to file the form, then wait for an approval from the IRS.
  2. The extension of time to file your return does not apply to the payment of the full amount of your taxes due. Any additional tax liability paid after April 15 may be subject to interest and penalties.

What if You Owe and Can’t Pay Your Entire Tax Bill

Whether you’re self-employed or a W-2 employee, if you can’t pay your complete tax liability by the filing date, don’t panic – you do have options.

The most popular is to set up an installment agreement with the IRS. Under this agreement, you’ll have up to 72 months to pay your tax liability. But interest and penalties will accrue during the installment period, so it will be in your best interest to complete the plan as quickly as possible.

If you’re unable to pay your tax liability due to a hardship, you can apply for an Offer in Compromise. If the offer is accepted, the IRS may agree to accept less than the full amount of your tax liability due.

If you are in need of an offer in compromise, it may be best to engage the services of a CPA or an enrolled agent. He or she will have a better understanding of what circumstances qualify as a hardship, as well as how to effectively deal with the IRS.

Getting Your Tax Refund As Soon As Possible

Some people still prefer to paper file their tax returns, for whatever reason. But if you do, and you’re owed a refund, it can take as long as eight weeks to get your money.

Keeping in mind that the IRS does not pay interest on refund balances, you owe it to yourself to get your refund back as quickly as possible.

E-File

The best way to do this is to e-file, which tax preparation software programs and most professional tax preparers will do automatically. This should include setting up direct deposit on your tax return.

That’s just a matter of electing direct deposit for your refund, then supplying the routing number of your financial institution and your personal account number on the return.

By using this method, your refund should be direct deposited into your financial account in about two weeks.

Instant Tax Refund Offers

Many professional tax preparers, anxious to get customers, will offer an immediate refund upon completion of your tax return. If you go this route, you’ll get a reduced refund.

That’s because the instant refund is actually a refund anticipation loan. That is, the tax preparer is advancing you your refund, but charge you a fee for the service.

This is only recommended if you absolutely, positively need to get your refund immediately. Otherwise it’s best to e-file with direct deposit, and get your full refund in about two weeks.

Final Thoughts on Complete Tax Guide for 2020 for 2019 Tax Prep

Use this guide only as a loose roadmap for preparing your 2019 income tax return, as well as anticipating the various intricacies of the tax law and any advance preparations you may need to make.

The information contained in this guide is only preliminary, and will be subject to finalization by the IRS. This may fully not occur until January, 2020, or even later with certain specific provisions.

Generally speaking, the most cost-effective way to prepare your tax return is to use one of the popular tax preparation software plans. They’ve reached a point where they can accommodate virtually all common tax situations, and even many complicated ones, such as the self-employed or real estate investors.

But if you feel uncomfortable preparing your own tax return, or if you have an especially complicated tax return, you may want to engage the services of a paid preparer. This may be even more necessary if you’ve been audited in the past few years. An experienced tax preparer should be able to identify the areas in your return that could trigger an audit, and recommend needed modifications.

Once again, we’ll update this guide as the 2019 tax season unfolds early in 2020.

Grant Sabatier

Creator of Millennial Money and Author of Financial Freedom (Penguin Random House). Dubbed "The Millennial Millionaire" by CNBC, Grant went from $2.26 to over $1 million in 5 years, reaching financial independence at age 30. Grant has been featured in The New York Times, Wall Street Journal, BBC, NPR, Money Magazine and many others. He uses Personal Capital to manage his money in 10 minutes a month.

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