What You Need to Know About New 2020 Tax Changes

In late December 2017, President Trump signed the Tax Cuts and Jobs Act into law and brought sweeping changes to the tax code. The Tax Cuts and Jobs Act reduced individual income tax rates and doubled the amount of the standard deduction while eliminating personal exemptions.

Not only was the top individual tax rate reduced from 39.6% to 37%, but the corporate tax rate also was reduced from 35% to 21% on a permanent basis.

For this reason, the Trump tax overhaul has generally been perceived as more favorable to corporations, financial services companies, and wealthy individuals than it is to typical Americans.

However, H & R Block did report that based upon data through March 31, 2019, their clients showed an approximate 25% decrease in client tax liabilities for tax year 2018.

With calendar year 2019 soon coming to a close, now might be a good time to familiarize oneself with what will be new about taxes in 2020. Let’s take a closer look.

Each year, the IRS adjusts many of its tax provisions in an effort to guard against “bracket creep,” which takes place when inflation pushes taxpayers into higher income tax brackets and/or reduces the benefits individuals derive from credits and deductions, irrespective of any real increase in income.

The Internal Revenue Service has announced its annual inflation adjustments for 2020 that include tax bracket schedules, tax tables and cost of living adjustments.

Importantly, the numbers discussed here go into effect for the tax year that begins on January 1st, 2020 and should not be used until it becomes time to prepare 2020 tax returns in 2021.

There are seven tax brackets in 2020, with the highest once again being 37% for those individual taxpayers who earn more than $518,400 and for married couples filing jointly who earn more than $622,050. For a closer look at 2020 tax brackets.

The standard deduction increases $200 to $12,400 for single filers and $400 to $24,800 for married couples who file jointly. The standard deduction for heads of households increases $300 to $18,650.

The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed $1,100 or the sum of $350 and the dependent’s earned income, whichever is greater – but not to exceed the previously stated regular standard deduction amounts.

Meantime, the Alternative Minimum Tax Exemption for single filers rises $1,200 to $72,900 and checks in at $113,400 for married couples filing jointly.

Meantime, the maximum Earned Income Tax Credit has increased slightly for inflation in 2020, at $538 for single and joint filers who have no children. The maximum credit for one child is $3,584; for two children $5920; and for three or more children, $6,660.

This represents a less than 2% increase from 2019’s high figure of $6,557. The Child Tax Credit remains unchanged at $2,000 per qualifying child, as does the refundable portion of the Child Tax Credit at $1,400.

Regarding the lifetime learning credit for 2020, the modified adjusted gross income used by single filers and heads of household ranges between $59,000 and $69,000; for married joint filers, this range is between $118,000 and $138,000.

In 2020, long-term capital gains tax rates will not change, although the brackets have been adjusted slightly higher for inflation.

Most taxpayers will pay a 15% capital gains tax, but for those earners in the 37% income tax bracket, a 20% capital gains tax rate will automatically apply. The 20% long-term capital gains tax rate will also ordinarily apply when an individual has over $441,450 in capital gains or when married couples filing jointly have more than $496,600 in capital gains.

Meantime, the 15% long-term capital gains tax rate applies to individual taxpayers with over $40,000 in capital gains and married couples filing jointly with over $80,000 in capital gains.

Interestingly, a 0% long-term capital gains tax rate applies when individuals have less than $40,000 in long-term capital gains and married couples filing jointly have less than $80,000 in long-term capital gains.

Note that all of the above relate to long-term capital gains on profits from the sale of an asset held for more than one year. Short-term capital gains on profits from the sale of an asset held for one year or less are taxed as ordinary income.

Finally, for employees who participate in employer retirement plans such as a 401k or 403b, the contribution limit has been increased by $500 to $19,500 in 2020.

Meantime, the “catch-up” contribution limit for employees aged 50 and over increases to $6,500, up from $6,000 in 2019. Additionally, the maximum contribution for SIMPLE retirement accounts has increased by $500 to $13,500 in 2020.

Meantime, the income ranges for eligible deductible contributions to traditional IRAs and Roth IRAs have been increased in 2020, as taxpayers can deduct contributions to traditional retirement accounts when certain conditions are met.

Single taxpayers covered by a workplace retirement plan are not phased out of the deduction until an income range of between $65,000 and $75,000, while for married joint filers the income phase-out range is between $104,000 and $124,000. Both of these range increases are modest, at less than 2% above the figures from 2019.

Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.

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