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.
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.
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.
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.
|
Tax Rate |
Single (in dollars) |
Married, Filing Jointly (in dollars) |
Married, Filing Separately (in dollars) |
Head of Household (in dollars) |
|
10% |
0 - 9,875 |
0 - 19,750 |
0 - 9,875 |
0 - 14,100 |
|
12% |
9,876 - 40,125 |
19,751 - 80,250 |
9,876 - 40,125 |
14,101 - 53,700 |
|
22% |
40,126 - 85,525 |
80,251 - 171,050 |
40,126 - 85,525 |
53,701 - 85,500 |
|
24% |
85,526 - 163,300 |
171,051 - 326,600 |
85,526 - 163,300 |
85,501 - 163,300 |
|
32% |
163,301 - 207,350 |
326,601 - 414,700 |
163,301 - 207,350 |
163,301 - 207,350 |
|
35% |
207,351 - 518,400 |
414,701 - 622,050 |
207,351 - 311,025 |
207,351 - 518,400 |
|
37% |
518,401 or more |
622,051 or more |
311,026 or more |
518,401 or more |
The minimum penalty for failing to file taxes increased from $330 to $435. So, it will cost you more if you skip filing.
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.
The Foreign Earned Income Exclusion increases by $1,700 to $107,600.
The maximum adoption credit increases by $220 to $14,300.
The adjusted gross income for joint filers to determine the reduction in the Lifetime Learning Credit increases by $2,000 to $118,000.
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:
Phaseout ranges for a Roth IRA:
The income limit for low to moderate-income workers changes.
Not everything received an increase for inflation. The following deductions remain the same as 2019.
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.