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November 12, 2019

Tax Planning in 2020: Tax Rates and Inflation-Adjusted Figures

Glasses sit on top of tax form.

The IRS and the Social Security Administration have released 2020 inflation-adjusted figures for more than 50 tax provisions. In addition to a 1.6% cost-of-living adjustment (COLA) for Social Security beneficiaries, details about adjustments to tax rate schedules, exemptions, and various thresholds for deductions and credits were announced. The tax year 2020 adjustments generally are used on tax returns filed in 2021.

Tax Rate Tables

The highest marginal tax rate for individuals of 37% applies in 2020 to taxable income over $622,050 for married couples filing jointly (up $9,700 from 2019) and $518,400 (up $8,100 from 2019) for single taxpayers. See the end of this article for all of the individual and the estate and trust income tax rate tables for 2020.

The thresholds related to the 3.8% Medicare tax on unearned income and the 0.9% Medicare tax on wages and self-employment income remain unchanged for 2020 because these amounts are now indexed for inflation. These thresholds are: $250,000 for married couples filing jointly and $200,000 for single filers. Estates and trusts enjoy a slight increase in the 3.8% Medicare tax threshold, however, because that threshold is equal to the dollar amount at which the highest income tax bracket begins.

Alternative Minimum Tax (AMT)

For 2020, the AMT exemption increases from $111,700 to $113,400 for married couples filing jointly and from $71,700 to $72,900 for single filers. The AMT exemption is reduced by 25% of the amount by which alternative minimum taxable income in 2020 exceeds $1,036,800 for married couples filing jointly ($518,400 for single taxpayers).

For 2020, the 28% AMT rate applies to excess alternative minimum taxable income above $197,900 for married couples filing jointly and for single filers ($98,950 for married taxpayers filing separately).

Itemized Deductions and Standard Deduction

The standard deduction for married couples filing a joint return is slightly higher for 2020. The new standard deduction is $24,800 (up $400). For single individuals and married couples filing separate returns, the standard deduction is $12,400 for 2020 (up $200). The 2020 standard deduction for heads of household increases to $18,650 (up $300).

Individuals with AGI in excess of certain thresholds no longer need to “hair cut” their total itemized deductions by the Pease limitation, which was removed under the tax reform law.

Child Tax Credit

The amount of the child tax credit that may be claimed for each qualifying child is $2,000. The child tax credit begins to phase out for married couples filing a joint return with modified adjusted gross income in excess of $400,000, or $200,000 for all other taxpayers. The child tax credit and the phase-out levels are not indexed for inflation. For lower-income taxpayers, a portion of the child tax credit for each qualifying child is refundable, and the refundable portion in 2020 is $1,400, which is the same as the 2019 level.

Estate and Gift Tax

For 2020, the lifetime exclusion from estate and gift tax has increased from $11,400,000 to $11,580,000. The annual gift tax exclusion in 2020 remains at $15,000. Gift splitting allows married couples to give up to $30,000 to a person without making a taxable gift. The exclusion for gifts to a spouse who is not a citizen of the United States increases $2,000 to $157,000 for 2020.

Education

The Hope Scholarship credit (American Opportunity Tax Credit) is equal to 100% of the amount of qualified tuition and related expenses not in excess of $2,000, plus 25% of those expenses that exceed $2,000 but do not exceed $4,000. Because the eligible expenses are not indexed for inflation, the maximum credit remains $2,500. This credit begins to phase out for single individuals whose modified adjusted gross income (MAGI) exceeds $80,000 and at $160,000 for married couples filing joint returns (these amounts also are not adjusted for inflation).

For tax years beginning in 2020, the Lifetime Learning Credit phases out for single individuals whose MAGI exceeds $59,000 and at $118,000 for married couples filing joint returns.

The $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for single individuals with MAGI in excess of $70,000 and for married couples filing joint returns with MAGI in excess of $140,000 in 2020. The deduction is completely phased out for taxpayers at 2020 MAGI of $85,000 for single individuals and $170,000 for married couples filing joint returns.

Kiddie Tax

The amount used to reduce the net earned income reported on a child’s return subject to the kiddie tax remains at $1,100 in 2020. The same $1,100 amount is used to determine if a parent may elect to include a child’s gross income in the parent’s income and to calculate the kiddie tax.

Foreign Earned Income

For individual taxpayers who work overseas, the amount of foreign earned income that may excluded from taxation increases from $105,900 to $107,600 in 2020.

COLA Limits for Qualified Plans

The cost of living adjustments (COLA) affect the maximum limits for a variety of contributions and distributions for 2020, including defined benefit accounts, 401(k)s, and other defined contribution plans, as well as limits on employee stock ownership plans (ESOPs) and benefits to highly-compensated employees.

Defined Contribution Plans

The limits on elective deferrals to 401(k), 403(b), certain 457 plans, and the federal government’s Thrift Savings Plan is increased to $19,500 for 2020 (up $500 from 2019). The limit on annual additions to defined contribution plans is increased in 2020 to $57,000 (up $1,000).

Defined Benefit Plans and ESOPs

The maximum amount a defined benefit plan may pay a participant each year is increased in 2020 to $230,000 (up $5,000 from 2019). The amount for determining the maximum ESOP account subject to a five-year distribution period is increased to $1,150,000 in 2020. The dollar amount used to determine the lengthening period of the five-year distribution is also increased to $230,000 for 2020.

Compensation Related Limits / Definitions

The annual compensation limit relating to the maximum compensation counted for an eligible employee in a qualifying plan is increased by $5,000 to $285,000 for 2020. The limitation used in the definition of a highly compensated employee is increased by $5,000 to $130,000. The dollar limitation concerning the definition of key employee in a top heavy plan is increased by $5,000 to $185,000. The compensation amount relevant to the definition of control employee for fringe benefit valuation purposes in 2020 increases to $115,000 for officers and increases to $230,000 for other employees.

Individual Retirement Accounts (IRAs)

Eligible taxpayers can contribute up to $6,000 to an IRA (excluding catch-up contributions discussed below), which is unchanged for 2020. For taxpayers who are active participants in an employer-sponsored retirement plan, the deduction for making contributions to a traditional IRA is phased out for single taxpayers who have MAGI in 2020 between $65,000 and $75,000, up $1,000 from the 2019 amounts. For married couples filing a joint return, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $104,000 to $124,000 in 2019, also up $1,000 from 2019. For married couples filing a joint return, in which the spouse who makes the IRA contribution is not an active participant in an employer-sponsored retirement plan but the other spouse is a participant, the deduction is phased out if the couple’s 2020 income is between $196,000 and $206,000, up $3,000 from 2019 levels.

The MAGI phase-out range for taxpayers making contributions to a Roth IRA in 2020 is $196,000 to $206,000 for married couples filing jointly, up $3,000 from 2019. For single taxpayers, the income phase-out range in 2020 is $124,000 to $139,000, up $2,000 from 2019.

Catch-up Contributions

The elective deferral limit for a SIMPLE plan is increased by $500 to $13,500 in 2020. The $3,000 catch-up amount for SIMPLE plans remains unchanged for 2020.

Social Security Wage Base Increases for 2020

The maximum amount of earnings subject to Social Security increased from $132,900 to $137,700 (up $4,800) in 2020. The Social Security Administration also reported that Social Security and Supplemental Security Income benefits will increase by 1.6% for 2020.

We have summarized the most common inflation adjustments here. For more information:

2020 Tax Rate Tables

Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:

The Tax Is:

Not over $19,750

10% of the taxable income

Over $19,750 but not over $80,250

$1,975 plus 12% of the excess over $19,750

Over $80,250 but not over $171,050

$9,235 plus 22% of the excess over $80,250

Over $171,050 but not over $326,600

$29,211 plus 24% of the excess over $171,050

Over $326,600 but not over $414,700

$66,543 plus 32% of the excess over $326,600

Over $414,700 but not over $622,050

$94,735 plus 35% of the excess over $414,700

Over $622,050

$164,307.50 plus 37% of the excess over $622,050

Unmarried Individuals (other than Surviving Spouses and Heads of Households)

If Taxable Income Is::

The Tax Is:

Not over $9,875

10% of the taxable income

Over $9,875 but not over $40,125

$987.50 plus 12% of the excess over $9,875

Over $40,125 but not over $85,525

$4,617.50 plus 22% of the excess over $40,125

Over $85,525 but not over $163,300

$14,605.50 plus 24% of the excess over $85,525

Over $163,300 but not over $207,350

$33,271.50 plus 32% of the excess over $163,300

Over $207,350 but not over $518,400

$47,367.50 plus 35% of the excess over $207,350

Over $518,400

$156,235 plus 37% of the excess over $518,400

Married Individuals Filing Separate Returns

If Taxable Income Is:

The Tax Is:

Not over $9,875

10% of the taxable income

Over $9,875 but not over $40,125

$987.50 plus 12% of the excess over $9,875

Over $40,125 but not over $85,525

$4,617.50 plus 22% of the excess over $40,125

Over $85,525 but not over $163,300

$14,605.50 plus 24% of the excess over $85,525

Over $163,300 but not over $207,350

$33,271.50 plus 32% of the excess over $163,300

Over $207,350 but not over $311,025

$47,367.50 plus 35% of the excess over $207,350

Over $311,025

$83,653.75 plus 37% of the excess over $311,025

Heads of Households

If Taxable Income Is:

The Tax Is:

Not over $14,100

10% of the taxable income

Over $14,100 but not over $53,700

$1,410 plus 12% of the excess over $14,100

Over $53,700 but not over $85,500

$6,162 plus 22% of the excess over $53,700

Over $85,500 but not over $163,300

$13,158 plus 24% of the excess over $85,500

Over $163,300 but not over $207,350

$31,830 plus 32% of the excess over $163,300

Over $207,350 but not over $518,400

$45,926 plus 35% of the excess over $207,350

Over $518,400

$154,793.50 plus 37% of the excess over $518,400

Estates and Trusts

If Taxable Income Is:

The Tax Is:

Not over $2,600

10% of the taxable income

Over $2,600 but not over $9,450

$260 plus 24% of the excess over $2,600

Over $9,450 but not over $12,950

$1,904 plus 35% of the excess over $9,450

Over $12,950

$3,129 plus 37% of the excess over $12,950

 

2019 Individual Tax Planning Supplement


Copyright © 2019, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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