It's everyone's favorite time of the year! Tax season is officially upon us and, while your focus is probably on filing your 2019 tax return by the recently extended July 15, 2020 deadline, it’s not too early to begin preparing for next year.1
In some cases, the deduction amounts remain the same as 2019. For example, medical and dental expenses, as well as state and local sales tax deductions, are not changing in the new year.
Standard deductions, income thresholds for tax brackets, certain tax credits, and retirement savings limits, however, have increased and may be important for you to keep in mind for your overall financial planning.
Brackets and Rates
For individuals filing as single and having income greater than $518,400, the top tax rate stays at 37 percent for the 2020 tax year. This is an increase from $510,300 in 2019. For married couples filing jointly (MFJ), this rate will be $622,050. For married individuals filing separately (MFS), it will now be $311,025 per person.2 Income ranges of other rates are as follows:
- 35% for single and MFS incomes over $207,350 ($414,700 for MFJ)
- 32% for single and MFS incomes over $163,300 ($326,600 for MFJ)
- 24% for single and MFS incomes over $85,525 ($171,050 for MFJ)
- 22% for single and MFS incomes over $40,125 ($80,250 for MFJ)
- 12% for single and MFS incomes over $9,875 ($19,750 for MFJ)2
The lowest rate is 10 percent for single individuals and MFS with income of$9,875 or less. Alternatively, married individuals filing jointly, or MFJ, can expect this rate if their combined income is not more than $19,750.2
You may be filing as head of household (HOH), in which case the income thresholds are identical to the rates for singles in the 37-, 35-, and 32-percent brackets. In alternative head of household brackets, the income thresholds have changed to:
- $85,501 - $163,300 in the 24 percent bracket
- $53,701 - $85,500 in the 22 percent bracket
- $14,101 - $53,700 in the 12 percent bracket
- Up to $14,100 in the 10 percent bracket3
For the 2020 tax year, rates on long-term capital gains have increased for specific income thresholds including:
- Zero percent for single and married individuals, filing separately, with incomes up to $40,000; up to $80,000 for married couples who file jointly; and up to $53,600 for heads of households.
- 15 percent for single income $40,001 to $441,450; $80,001 to $496,600 for married couples, filing jointly; $40,001 to $248,300 for married individuals, filing separately; and $53,601 to $469,050 for heads of households.
- 20 percent for single income exceeding $441,450; exceeding $496,600 for married couples, filing jointly; exceeding $248,300 for married individuals, filing separately; and exceeding $469,050 for heads of households.4
With standard deductions, only a few differences apply. Married couples filing jointly can look forward to an increase to $24,800 for the 2020 tax year, which is an increase of$400 from 2019. Single taxpayers and married individuals filing separately will notice the standard deduction rise to $12,400 for 2020 (up $200 from 2019). Heads of households can expect an increase to $18,650 for the 2020 tax year, which is is an increase of $300 from 2019.2
For single individuals, the alternative minimum tax (AMT) exemption amount for 2020 is $72,900, and starts to phase out at $518,400. Married couples filing jointly can expect the AMT exemption amount to be $113,400, which begins to phase out at $1,036,800.2
For employees participating in employer retirement plans such as 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan (TSP), the contribution limit has been raised to $19,500.5 The catch-up contribution limit, which is geared toward employees who are 50 years of age and older, has increased to $6,500, while the limit for SIMPLE retirement accounts has been gone up to $13,500 for the 2020 tax year.6
Under certain conditions, taxpayers can deduct contributions to a traditional IRA. For example, if either the taxpayer or their spouse was covered by an employer’s retirement plan, the deduction may be reduced or phased out. If neither the taxpayer nor their spouse is covered, the phase-out of the deduction does not apply.7 These ranges for 2020 are as follows:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
- For an IRA contributor who is not covered by a workplace retirement plan, but who is married to someone who is covered, the deduction is phased out if the couple's income is between $196,000 and $206,000.7
The limit for employee salary reductions for contributions to a health flexible spending account, or FSA, has gone up by $50 to $2,750 for 2020. Also, participants who have self-only coverage in a health savings account (HSA) must have a plan in which the annual deductible is between $2,350 and $3,550. Additionally, for self-only coverage, the maximum out-of-pocket expense amount is$4,750, which is an increase of $100 from 2019.2
For participants with family health coverage, the base for the annual deductible is now $4,750 for 2020. The deductible cannot exceed $7,100 and the out-of-pocket expense limit is $8,650, which is an increase of $100 from 2019.2
Estates and Gifts
Rules covering inheritances are also experiencing changes in the coming tax year. For example, estates of decedents who pass during 2020 have a basic exclusion amount of $11.58 million, which is up from $11.4 million for estates in 2019. The annual exclusion for individual gifts is $15,000 for the 2020 tax year, the same as it was for 2019.2
Regardless of your circumstances, the inflation adjustments of the IRS are meant to ease taxes, so it's important to be aware of changes and the latest amounts. With preparedness in mind, you’ll be able to plan effectively for the 2020 tax year.