Tax-Related Updates for 2020

CHANGES TO FEDERAL TAX BRACKETS1

As expected, the IRS has adjusted the 2020 tax brackets based on inflation.  They are as follows:

Tax RateSingleMarried, filing jointly Head of Household
10%0 to $9,8750 to $19,7500 to $14,100
12%$9,876 to $40,125$19,751 to $80,250$14,101 to $53,700
22%$40,126 to $85,525$80,251 to $171,050$53,701 to $85,500
24%$85,526 to $163,300$171,051 to $326,600$85,501 to $163,300
32%$163,301 to $207,350$326,601 to $414,700$163,301 to $207,350
35%$207,351 to $518,400$414,701 to $622,050$207,351 to $518,400
37%$518,401 and up$622,050 and up$518,401 and up

CHANGES TO DEDUCTIONS1

Per the IRS, the standard deduction is “a specific dollar amount that reduces the amount of income on which you’ve been taxed.”

The IRS has increased the standard deduction for 2020.  For singles, the standard deduction is now $12,400, up from $12,200.  For married couples filing jointly, it is $24,800, up from $24,400.  For heads of households, the standard deduction is $18,650, up from $18,350.

Remember, you can’t take the standard deduction if you also itemize deductions.  And for married couples filing separately, both spouses must take the same type of deduction. So, if one spouse chooses to itemize, the other spouse must as well.

CHANGES TO CAPITAL GAINS1

The income threshold for long-term capital gains rates has also gone up.  

Tax RateSingle Married, filing jointly Head of Household
0%0 to $40,0000 to $80,0000 to $53,600
15%$40,001 to $441,450$80,001 to $496,600$53,601 to $469,050
20%$441,451 and up$496,601 and up$469,051 and up

CHANGES TO 401(K)S3

For 401(k) and 403(b) plans , the maximum contribution limit for 2020 is now $19,500, up from $19,000 last year.  Those age 50 or older can also contribute an additional $6,500, using what’s known as a catch-up contribution.  That’s also up $500 from last year.   

CHANGES TO IRAS4

In December, Congress passed a new bill called the SECURE Act.  The bill, which went into effect on January 1, wasn’t about the tax code per se, but it did make some important tax-related changes to IRAs.  

Before the SECURE Act, owners of a traditional IRA would have to begin making withdrawals at age 70½.  (These are called required minimum distributions, or RMDs.)  Now, that age has increased to 72.  That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.

Another change is for new parents.  Previously, a non-retired person had to be 59½ years old to make early withdrawals from a traditional IRA. If they withdrew money earlier than that, they would have to pay a penalty of 10% on the amount they took out, except in a few extraordinary circumstances.  

Under the SECURE Act, new parents can now withdraw funds penalty-free to help cover birth and adoption expenses.  This is especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they need to be made within one year of the birth or adoption.

By the way, if you haven’t already contributed to an IRA, there’s still time to do so.  Many people don’t know that the 2019 contribution deadline is actually April 15, 2020.5  However, if you do decide to contribute, you must designate the year you are contributing for.  (In this case, 2019.)  Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact me if you have any questions or need help.

For 2019, the maximum amount you can contribute is $6,000, or $7,000 if you’re over the age of 50.5  This applies to both traditional and Roth IRAs.  

If you have yet to set up an IRA for 2019, you can still do that.  The deadline to establish an IRA is also April 15th.  In other words, if you want to take advantage of the benefits an IRA has to offer, there’s still time to do so, either by contributing to an existing account or by establishing a new one.  

CHANGES TO 529 PLANS4

Another tax-related change is for parents and grandparents with 529 plans.

As you may know, any funds invested in a 529 plan can be used to help pay for college expenses, like lodging or tuition.  The best part is that the funds are exempt from federal taxes, and often state taxes, too, so long as they’re used solely for education expenses.  

Under the SECURE Act, parents with 529 plans can make a tax-free withdrawal of up to $10,000 to help pay off their child’s student loans.  This number is per person, not per plan, which means another $10,000 can be withdrawn to help pay the student debt for each of the plan beneficiary’s siblings!

CHANGES TO ESTATE TAXES1

For 2020, the estate tax exemption will be $11,580,000 per individual.  That’s up from $11.4 million in 2019.  That means any estates worth less than this amount will be exempt from paying the estate tax. 

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We hope you found this information helpful.  Obviously, it’s not a completely exhaustive list of every tax change for 2020.  But it is an overview of some of the most important ones.  If you have any questions or concerns, please let us know.  

Sources

1 “Revenue Procedure 2019-44,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/pub/irs-drop/rp-19-44.pdf” https://www.irs.gov/pub/irs-drop/rp-19-44.pdf

2 “Standard Deduction,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/taxtopics/tc551” https://www.irs.gov/taxtopics/tc551

3 “401(k) contribution limit increases,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500” https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500

4 Text of “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” (page 1532), Senate Appropriations Committee, December 16, 2019.   HYPERLINK “https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF” https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF

5 “IRA FAQs – Contributions,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions” https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions