The IRS Announces New Tax Numbers for 2020
Each year, the IRS updates the existing tax code numbers for items which are indexed for inflation. This includes the tax rate tables, many deduction limits, and exemption amounts. The following are the tax numbers impacting most taxpayers which will be in effect beginning January 1, 2020.
Understanding your potential tax liability for next year will help you make decisions in 2020 to lower the taxes you pay. You can also Schedule a Meeting with Purposeful Strategic Partners to discuss multi-decade tax planning, including advice on managing lifetime taxes related to Required Minimum Distributions, Roth conversions, sales of significant assets, and more.
Looking for the 2019 Tax Tables?
If you are looking for the tax tables for filing your 2019 taxes by April of 2020, click the button below. This article references the 2020 tax tables for the tax forms to be filed in April 2021.
2020 Income Tax Brackets
The most important update for many Americans is the tax brackets; the changes to the income ranges for the marginal tax rates. Each bracket saw an increase in the range tied to inflation.
The image shows the 2020 tax brackets which you will use to calculate your taxes to be filed in 2021. (Numbers are rounded to the nearest dollar where needed.) Every tax bracket got a little bump up in size, allowing more of your money to be taxed at lower rates.
Understanding the tax brackets will help you to estimate your potential tax liability next year. Armed with your estimated taxes, you then have until December 2020 to make charitable contributions, invest for retirement, or do other things which can help manage and lower your tax liability.
Also included in the table is the actual income taxes you will owe based on your income level. The table provides the two most common filing statuses: Married Filing Jointly, and Single Individuals.
For those who file either Married Filing Separate or Head of Household, an abbreviated table is below showing the income ranges for each tax bracket.
Married Filing Separate Tax Table
10% - $0 to $9,875
12% - $9,876 to $40,125
22% - $40,126 to $85,525
24% - $85,526 to $163,300
32% - $163,301 to $207,350
35% - $207,351 to $311,025
37% - Over $311,025
Head of Household Tax Table
10% - $0 to $14,100
12% - $14,101 to $53,700
22% - $53,701 to $85,500
24% - $85,501 to $163,300
32% - $163,301 to $207,350
35% - $207,351 to $518,400
37% - Over $518,400
Deductions & Exemptions
In addition to the tax rates, the IRS upped many of the deductions and exemptions Americans use to lower their taxable income calculation, and therefore their taxes. Below are some of the most common deductions and exemptions Americans can take.
Standard Deduction for 2020
$24,800 – Married filing jointly and surviving spouses
$18,650 – Head of Household
$12,400 – Unmarried individuals
$12,400 – Married filing separately
The Standard Deduction is an amount every taxpayer is allowed take as a deduction from their income to reduce their taxable income. The Standard Deduction is used by individuals and families who do not itemize or who have itemized deductions less than or near the Standard Deduction. Under the new tax law, many itemized deductions were eliminated or greatly limited while the Standard Deduction was increased. As a result, the vast majority of people will be filing using the Standard Deduction, even if those who itemized in the past.
The additional standard deduction for the aged or the blind is $1,300 for 2020 or $1,650 if the taxpayer is also unmarried and not a surviving spouse.
Personal Exemption
$0 – Personal Exemption, one for each qualifying household member
The current tax code sets a $0 Personal Exemption amount for the purposes of calculating taxable income, effectively removing the Personal Exemption for tax filers. The Personal Exemption is still used in other areas of the tax code, i.e. for setting the gross income limitation for a qualifying relative.
Estate Tax Exemption
$11,580,000 – The amount a person can pass on to their heirs which is exempt from estate taxes.
The estate tax is effectively a tax on dying, where the Federal Government takes up to 37% of the value of the estate (everything owned by the deceased). Fortunately, the estate tax credit creates an amount you can pass on to your heirs without being taxed.
Annual Exclusion for Gifts
$15,000 per person, per person
You can also avoid the estate tax by gifting small amounts each year to your heirs. The Gift Tax Annual Exclusion remained the same between 2019 and 2020. Gifts of less than the annual gift exclusion are passed on tax-free, while gifts over the exemption amount could be subject to the unified gift and estate tax.
What per person, per person means: The gift exclusion applies to each person an individual gives a gift to. So a married coupe with a son and daughter could gift a total of $60,000 per year to their children. $15,000 from father to son; $15,000 from father to daughter; $15,000 from mother to son; and $15,000 from mother to daughter. If the children were married, an additional $60,000 could be gifted to their spouses.
Alternative Minimum Tax (AMT)
Until recently, the Alternative Minimum Tax had unfortunately become the bane of the middle class because the exemption amount was not indexed for inflation. Middle-class households had ended up being a majority of the AMT taxpayers. The exemptions were indexed for inflation by the Obama Administration and increased by the Trump Administration, which greatly reduced the impact of the AMT on the middle class.
The AMT offers fewer deductions, increasing the taxes owed by individuals. The AMT offers a much higher exemption than the traditional tax code, which is designed to avoid middle-class taxpayers from being hit by the AMT.
Exemption Amounts
$113,400 – Married or Surviving Spouses
$72,900 – Unmarried Individuals
$56,700 – Married Filing Separately
$25,400 – Estates and Trusts
Exemption Phaseouts Begin
Another change to the AMT designed to help avoid it hitting the middle class is the change to the exemption phaseout. The phase-outs are now significantly higher, reducing the chances middle-class individuals will be hit by the AMT. If your income is over the above amounts, you'll begin losing your exemption which will increase your AMT tax faster.
$1,036,800 – Married or Surviving Spouses
$518,400 – Unmarried Individuals
$518,400 – Married Filing Separately
$84,800 - Estates and Trusts
28% AMT Tax Bracket
Normally, AMT is taxed at a flat rate of 26%. For “high-income” taxpayers, however,, a 28% tax is applied to income in excess of the following amounts. Again, the 28% tax rate hits the middle-class.
Income over $197,900 – Joint Returns, individual returns, estates and trusts.
Income over $98,950 – Married filing separately
Source: IRS.gov
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Joshua Escalante Troesh, CFP, is a Tenured Professor of Business and the founder of Purposeful Finance. He works with people across the country on their financial planning needs through Purposeful Strategic Partners, a fiduciary and fee-only financial advisor and a Registered Investment Advisor. He can be reached for comment at info@purposefulfinance.org