2020 Tax Code Changes: Important Changes You Should Know For Tax Planning This Q4

It's October and we've officially entered the fourth quarter of 2020 and while it feels like we just finished filing our 2019 taxes, it’s never too early to begin preparing for next year.¹ 

There are some cases in which the deduction amounts remain the same as 2019. For instance, medical and dental expenses, as well as state and local sales, are not changing in the new year. 

However, standard deductions, income thresholds for tax brackets, certain tax credits and retirement savings limits have increased and may be important for you to keep in mind. 

Brackets & Rates

For individual taxpayers filing as single and with income greater than $518,400, the top tax rate remains 37 percent for the 2020 tax year. This is an increase from $510,300 in 2019. For MFJ, or married couples filing jointly, this rate will be $622,050 and for MFS, or married individuals filing separately, it will now be $311,025 per person.² Income ranges of other rates are as follows: 

• 35% for single and MFS incomes over $207,350 ($414,700 for MFJ) 
• 32% for single and MFS incomes over $163,300 ($326,600 for MFJ)
• 24% for single and MFS incomes over $85,525 ($171,050 for MFJ)
• 22% for single and MFS incomes over $40,125 ($80,250 for MFJ)
• 12% for single and MFS incomes over $9,875 ($19,750 for MFJ)²

The lowest rate is 10 percent for single individuals and MFS, whose income is $9,875 or less. Alternatively, married individuals filing jointly, or MFJ, can expect this rate if their combined income does not exceed $19,750.² 

You may be filing as head of household, or HOH, in which case the income thresholds are the same as the rates for singles in the 37, 35 and 32 percent brackets. In alternative head of household brackets, the income thresholds are now:

• $85,501 - $163,300 in the 24 percent bracket
• $53,701 - $85,500 in the 22 percent bracket
• $14,101 - $53,700 in the 12 percent bracket
• Up to $14,100 in the 10 percent bracket³

Capital Gains

The 2020 tax year also includes increases in long-term capital gains rates for particular income thresholds including: 

• Zero percent for single and married individuals, filing separately, with incomes up to $40,000; up to $80,000 for married couples, filing jointly; and up to $53,600 for heads of households.
• 15 percent for single income $40,001 to $441,450; $80,001 to $496,600 for married couples, filing jointly; $40,001 to $248,300 for married individuals, filing separately; and $53,601 to $469,050 for heads of households.
• 20 percent for single income exceeding $441,450; exceeding $496,600 for married couples, filing jointly; exceeding $248,300 for married individuals, filing separately; and exceeding $469,050 for heads of households.⁴

Standard Deductions

When it comes to standard deductions a few differences apply. Married couples filing jointly can expect an increase to $24,800 for the 2020 tax year, which is up $400 from 2019. Single taxpayers and married individuals filing separately will notice the standard deduction rise to $12,400 for 2020 (up $200 from 2019). Lastly, heads of households can expect an increase to $18,650 for the 2020 tax year, which is up $300 from 2019.² 

For single individuals, the alternative minimum tax, or AMT, exemption amount for 2020 is $72,900 and begins phasing out at $518,400. Married couples filing jointly can expect the AMT exemption amount to be $113,400, which begins to phase out at $1,036,800.²

Retirement Plans

For employees participating in employer retirement plans including 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan (TSP), the contribution limit has increased to $19,500.⁵ The catch-up contribution limit, which is geared towards employees age 50 and older, has increased to $6,500 and the limit for SIMPLE retirement accounts has been raised to $13,500 for the 2020 tax year.⁶ 

If taxpayers meet certain conditions, they can deduct contributions to a traditional IRA. For instance, if either the taxpayer or their spouse was covered by an employer’s retirement plan, the deduction may be reduced or phased out. If neither the taxpayer or their spouse is covered, the phase-out of the deduction does not apply.⁷ These ranges for 2020 are as follows:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000.
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
• For an IRA contributor who is not covered by a workplace retirement plan, but who is married to someone who is covered, the deduction is phased out if the couple's income is between $196,000 and $206,000.⁷

Health Spending

The dollar limit for employee salary reductions for contributions to a health flexible spending account, or FSA, has increased $50 from 2019 to $2,750. Also in 2020, participants who have self-only coverage in an HSA, or health savings account, must have a plan in which the annual deductible is not less than $2,350 and no more than $3,550. Additionally, for self-only coverage, the maximum out-of-pocket expense amount of $4,750, which is an increase of $100 from 2019.² 

For participants with family health coverage, the base for the annual deductible is now $4,750 for the year 2020. The deductible cannot exceed $7,100 and the out-of-pocket expense limit is $8,650, which is an increase of $100 from 2019.² 

Estates & Gifts

Inheritances are also experiencing changes in the coming tax year. For instance, estates of descendants who pass during 2020 have a basic exclusion amount of $11.58 million, which is up from $11.4 million for estates in 2019. The annual exclusion for individual gifts is $15,000 for the 2020 tax year, the same as it was for 2019.² 

Regardless of your circumstances, the inflation adjustments of the IRS are meant to ease taxes, which means it pays to be aware of changes and the latest amounts. With preparedness in mind, you’ll be able to thoughtfully plan for the 2020 tax year ahead.