Numbers Taxpayers Need to Know for 2020 by Jeffrey M. Mutnik, CPA/PFS
Posted on December 03, 2019
The IRS recently announced the annual inflation adjustments to various provisions of the tax code for 2020. Taxpayers should consider these changes very carefully as they plan for tax efficiency in 2020 and when they prepare to file their 2020 tax returns in 2021. It is also for taxpayers to keep in mind that these numbers can change dramatically in the future, depending on the results of the November 2020 presidential election. Proper tax planning under the guidance of experienced CPAs and advisors is critical.
Tax Rates for Individuals and Married Couples Filing Jointly
The top tax rate of 37 percent will apply to individual taxpayers whose income exceeds $518,400 in 2020, or $622,051 for married taxpayers filing joint returns. The other six tax rates break down as follows:
- 35 percent for individuals with income over $207,350 ($414,700 for married couples filing jointly);
- 32 percent for incomes over $163,300 ($326,600 for married couples filing jointly);
- 24 percent for incomes over $85,525 ($171,050 for married couples filing jointly);
- 22 percent for incomes over $40,125 ($80,250 for married couples filing jointly);
- 12 percent for incomes over $9,875 ($19,750 for married couples filing jointly); and
- 10 percent for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).
Estate and Gift Tax Exemptions
The maximum amount a decedent who dies in 2020 can exclude from his or her taxable estate will be $11.58 million, up from $11.4 million in 2019. Married couples will be able to shield $23.16 million from federal estate taxes in 2020. Taxpayers who reside in 17 states and the District of Columbia should also remember that they will be subject to estate and inheritance taxes on the state level.
The maximum amount an individual may gift to as many people as they wish in 2020 without incurring gift tax will remain at $15,000 (or $30,000 for married couples filing joint tax returns). Married spouses, however, can continue to make an unlimited number of tax-free gifts to each other as long as both are U.S. citizens. Excluded from the gift tax exemption are gifts of future interests in property.
Standard Deduction Amounts
The standard deduction will increase from $12,200 in 2019 to $12,400 for individual taxpayers, $24,800 for married couples filing separately, and $18,650 for heads of household in 2020. Taxpayers whose expenses exceed these thresholds may opt instead to itemize their deductions while being mindful of the various limits the new tax law imposes on those tax benefits.
Alternative Minimum Tax (AMT)
For 2020, the Alternative Minimum Tax (AMT) exemption will increase to $72,900 for individuals and begin to phase out when income reached $518,400. For married couples filing jointly, the exemption will be $113,400, which will begins to phase out when income reaches $1,036,800.
Foreign Earned Income Exclusion
The foreign earned income exclusion will increase $1,700 to $107,600 in 2020.
Minor children under the age of 19 and college students under the age of 24 with unearned income of $2,200 or more in 2020 from sources other than salary and wages will be subject to tax at the same rate as trusts and estates. For 2020, the tax rate can be as low as 10 percent for unearned income up to $2,600, or as high as 37 percent for unearned income above $12,950.
Retirement Plan Contribution Limits
Individual taxpayers will be able to contribute up to $19,500 in 2020 to employer-sponsored 401(k), 403(b) and most 457 plans, a $500 increase from 2019. Catch-up contributions for taxpayers age 50 and older will also increases to $6,500 in 2020. Similarly, self-employed business owners can save even more in 2020, up to $57,000, with SEP IRAs or solo 401(k)s, based on the amount they can contribute as an employer as a percentage of their salary, subject to compensation limits.
By contrast, the contribution limits to IRAs and Roth IRAs will remain at $6,000, plus an additional $1,000 for qualifying savers age 50 and older. The amount of the deduction may be reduced based on a taxpayer’s access to a retirement plan through his or her employer or the employer of his or her spouse’s employer, his or her filing status and income. For 2020, the deduction for taxpayers making contributions to traditional IRAs will be phased out for single filers covered by a workplace retirement plan and with modified adjusted gross incomes (AGI) between $65,000 and $75,000. For married couples filing jointly in which the spouse making the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $104,000 to $124,000 for 2020; when the contribution is made by the spouse who is not covered by a workplace retirement plan but is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000.
Roth IRA savers are also subject to income limitations. In 2020, the AGI phase-out range for taxpayers making contributions to Roth IRAs is $124,000 to $139,000, or $196,000 to $206,000 for married couples filing jointly.
The dollar amount that employees may contribute to health flexible savings accounts via salary deferrals in 2020 increases to $2,750. In addition, high-deductible health plans (HDHP) for self-only coverage in a medical savings account must have an annual deductible that is between $2,350 and $3,550 with a maximum out-of-pocket expense of $4,750. For HDHP participants with family coverage, the annual deductible must be between $4,750 and $7,100 with a maximum out-of-pocket expense limit of $8,650.
To learn more about these inflation adjustments and how taxpayers can leverage them to minimize tax liabilities and maximize savings in 2020, please contact the advisors and CPAs with Berkowitz Pollack Brant.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with Berkowitz Pollack Brant’s Taxation and Financial Services practice, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.