The federal government loves to change the tax rules every year or so. Sometimes, it's in the taxpayers' favor. Some tax reform legislation provides for annual updates, so a new tax law remains in effect and creates changes automatically.

Now that the books for 2019 are closed, let's take a look at what 2020 has in store. Keep in mind, this is information for earnings made in 2020, with taxes due in April 2021.

Our Progressive Tax System

Taxes would be easier if everyone paid a flat tax on the money they earn, but that isn’t how the US sets things up. Instead, Americans enjoy a progressive tax system, which makes things a little tricky and keeps accountants and tax preparation firms in business.

What does that mean, a progressive tax? 

It means that being in a specific tax bracket doesn't mean you pay that tax rate on all of your earnings. Your income is divided into chunks called tax brackets, and each piece is taxed at a particular rate determined by the tax laws.  

Example

A single filer has $32,000 in taxable income. The first $9,700 of earnings is taxed at the lowest rate: 10%. The rest is taxed at 12%, according to the tax brackets.

$32,000 - $9,700 = $22,300

$9,700      x 0.10 = $970

$22,300   x 0.12 = $2,676

Total Tax   =       $3,646

If the entire amount of $32,000 had been taxed at 12%, the total tax would have been $3,840. Progressive taxation saved you $194.

Changes in Tax Brackets

Every year, people (hopefully) make more money. Every year, Uncle Sam changes the tax brackets to match. For 2020, the following tax brackets have been set. Actually, the percentages are the same as 2019 — 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

However, the ranges for each type of filer changed in response to inflation.

Change in Failure To File Penalty

The minimum penalty for failing to file taxes increased from $330 to $435. So, it will cost you more if you skip filing. 

Deduction, Credit, and Health Account Changes

Standard Deduction

• Increases $400 to $24,800 for married, filing jointly. 
• Increases $200 to $12,400 for filing single and married, filing separately.
• Increases $300 to $29,650 for head of household.

Alternative Minimum Tax (AMT) Exemption Amount

• Increases to $113,400 and beginning to phase out at $1,063,800 for married, filing jointly.
• Increases to $72,900 and beginning to phase out at $518,400 for filing single and married filing separately.

Earned Income Tax Credit

• For qualifying taxpayers with three or more qualifying children, the credit increases to $6,660, an increase of $103. 
• For married taxpayers with no children, the amount is $538.
• Phaseouts apply, so check the revenue procedures in the IRS documentation.

Limitation for Health Flexible Spending 

The dollar limitation for employee salary reductions for contributions to a health flexible spending account or arrangement increases to $2,750, an increase of $50.

Medical Savings Accounts for Self-Only and Family Coverage

• Individuals with self-only coverage in a medical savings account plan must have an annual deductible of at least $2,350 (the same as 2019). However, the annual maximum deductible increases $50 to $3,550.
• Self-only coverage maximum out of pocket expense increases $100 to $4,750.
• Family coverage minimum annual deductible is up $100 to $4,750, with maximum deductible up $100 to $7,100.
• Family coverage maximum out of pocket expense rises $100 to $8,650.

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion increases by $1,700 to $107,600.

Adoption Credit

The maximum adoption credit increases by $220 to $14,300.

Lifetime Earning Credit

The adjusted gross income for joint filers to determine the reduction in the Lifetime Learning Credit increases by $2,000 to $118,000.

Changes to Retirement Plans

401(k), 403(b), 457, TSP (Thrift Savings Plan)

• The contribution limit for employees participating in employer-provided retirement plans has increased $500 to $19,500.
• The catch-up contribution limit for employees 50 years old or older increases $500 to $6,500.
• The contribution limit for the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) retirement accounts increases $500 to $13,500.

Traditional and Roth IRA

Contributions to a traditional IRA may be deductible if they meet specific conditions. If during 2020, a taxpayer or spouse has a retirement plan from an employer, the deduction may be phased out or reduced. Without participation in an employer retirement plan, the phaseout is eliminated.

Phase-out ranges for a traditional IRA:

• Single taxpayers - $65,000 to $75,000 (Up $1,000).
• Married, filing jointly where spouse making IRA contribution is covered by employer retirement plan - $104,000 to $124,000.
• Married, filing jointly where a spouse making the IRA contribution is not covered by an employer retirement plan, but who is married to someone who is covered by an employer retirement plan - $196,000 to $206,000 (Up $3,000).
• Married filing separately and covered by an employer retirement plan, the phaseout range remains the same as 2019 - $0 to $10,000.

Phaseout ranges for a Roth IRA:

• Single taxpayers and head of household - $124,000 to $139,000 (Up $2,000).
• Married, filing jointly - $196,000 to $206,000 (Up $3,000).

Retirement Savings Contribution Credit

The income limit for low to moderate-income workers changes. 

• Single taxpayers and married, filing separately - $32,500 (Up $500).
• Married, filing jointly - $65,000 (Up $1,000).
• Head of household - $48,750 (Up $750).

What Stays the Same as 2019

Not everything received an increase for inflation. The following deductions remain the same as 2019.

• Medical and dental expenses
• State and local taxes
• The deduction limit for charitable cash donations to public charities
• Itemized deduction limitations (there are none)
• Capital gains rates (although the brackets for the prices change)
• Personal exemption remains at $0
• The annual exclusion of gifts remains at $15,000

Use these updated numbers to estimate your tax liability for the coming year. If you expect significant changes, like getting married, having children, or receiving a substantial change in income, consider adjusting your withholding now. If you make estimated tax payments, you may want to tweak those.

Tax laws change, but the fact that you must file and pay taxes remains the same. If you have any questions, please give us a shout.