April 2020 is just a few months ahead and we’re already getting some good news on the tax front! The Internal Revenue Service (IRS) has released its new tax rules and regulations and we’re seeing more than a few increases in the standard deductions, income thresholds and tax credits as well as limits on retirement savings.
Before claiming these increases, so to speak, be sure to speak with your tax advisor at H&R Block. You want to prevent misunderstandings about the IRS rules and regulations because of the repercussions otherwise.
Income Brackets and Rates
The tax rate for individual taxpayers filing as single is still at 37% but the income threshold has increased from $510,300 in 2019 to $518,400 in 2020. For married couples filing jointly (MFJ), the income threshold at this rate is $622,050 while it’s $311,025 for married individuals filing separately (MFS).
The income thresholds and rates for higher incomes are as follows:
- 35% for single and MFS with income above $207,350 and $414,700 for MFJ
- 32% for single and MFS with income above $163,300 and $326,600 for MFJ
- 24% for single and MFS with income above $85,525 and $171,050 for MFJ
- 22% for single and MFS with income above $40,125 and $80,250 for MFJ
- 12% for single and MFS with income exceeding $9,875 and $19,750 for MFJ
- 10% for single and MFS with income $9,875 or less and less than $19,750 for MFJ
For taxpayers filing as head of household (HOH):
- 37% with income above $518,400
- 35% with income above $207,350
- 32% with income above $163,300
- 24% with income range $85,501 – $163,300
- 22% with income range $53,701 – $85,500
- 12% with income range $14,101 – $53,700
- 10% for up to $14,000
Keep in mind, too, that the correct computation of income is a must! You have to work with your tax advisor in determining your annual income for 2020 as the rules on what can be considered as taxable income may also change.
The good thing about the increase in standard deductions is that it means a decrease in taxable income, too, if your income for 2020 didn’t change significantly from your 2019 income. For MFJ taxpayers, the standard deduction is $24,800 in 2020, an increase of $400 from 2019. There’s also a $200 increase in standard deduction for single and MFS taxpayers, from $12,200 in 2019 to $12,400 in 2020. For HOH, the 2020 standard deduction has also increased by $300 or from $18,350 in 2019 to $18,650 in 2020.
The alternative minimum tax exemption amount has also increased – it’s now $72,900 with a phasing out amount at $518,400 for single filers in 2020. For MFJ taxpayers, it’s $113,400 with starts phasing out at $1,036,800.
The increases in tax credits are more modest but still good news, if you choose to have a more positive view of taxes. The maximum earned income credit (EIC) has increased to $6,660 for eligible taxpayers with three or more qualifying children; the 2019 credit was $6,557 so the increase isn’t something to write to your mother about.
The modified adjusted gross income (MAGI) has also slightly increased. For MFJ, it’s $118,000 and phases out at $138,000; in 2019, it was $116,000-$136,000. For single taxpayers and HOH, it’s $59,000-$69,000; in 2019, it was $58,000-$68,000.
Note: MFS taxpayers cannot claim it.
Yet another slight increase is the contribution limit for employees with contributions in employer retirement plans including most 457 plans, 401(k)s, 403(b)s, and the Thrift Savings Plan (TSP). From $19,000 in 2019, it’s now $19,500 in 2020.
Likewise, the catch-up contribution limit for employees 50 years old and above has increased by $500, from $6,000 in 2019 to $6,500 in 2o20. The $500 increase also applies to the contribution limit for SIMPLE retirement accounts, from $13,000 in 2019 to $13,500 in 2020.
When discussing your tax returns for filing in April 2020 0r earlier with your tax advisor, you have to be honest about your income and expenses, even when these seem embarrassing. Remember that keeping relevant information from your tax advisor is akin to keeping it from the taxman and it may constitute a federal offense. Yes, there are plenty of reasons why the IRS and its agents have earned a reputation for playing hardball because they do!
If you want to minimize your tax payments, you should have a tax plan as early as January of every year. You can then move your assets, plan your expenses and their timing, and choose your investments wisely. You may think that hiring a tax advisor isn’t cost-efficient because you can do the tax planning yourself.
But remember, too, that with the maze of IRS rules and regulations, many of which change nearly every year, your head will ache from dealing with the taxman and his forms. This is where a reliable tax expert comes in and he will be worth every cent you pay him for his expertise.