There are few certainties in life. Taxes is one of them.
And every year, like clockwork, there are updates to the federal tax brackets and retirement contribution limits.
It’s nearing the end of 2019 and the IRS recently published next year’s tax updates.
This is easily your biggest life expense.
So it’s worth taking a few moments to understand the changes, think about where you might “land” next year, and consider whether there are any optimizations you can do (e.g., adjusting your retirement contributions).
This week’s podcast episode summarizes the key tax changes to be aware of in 2020.
What you’ll learn in this episode:
- Federal income tax rates for 2020
- Standard deduction changes
- Alternative Minimum Tax updates
- Capital gains tax rates for 2020
- Retirement & tax-advantaged account changes
- Roth IRA Income Limits
- IRA Deduction Phaseouts
- Misc updates: state & local taxes, mortgage interest deduction, Child Tax Credit, estate tax, foreign earned income exclusion, Section 199A
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Links mentioned in this episode:
- How the final Trump tax bill affects you: analysis and charts
- Take a year off with the foreign earned income exclusion
- TurboTax TaxCaster
- HYW private Facebook community
Read this episode as a post:
The 2020 inflation-adjusted tax brackets and retirement contribution limits are here.
Here is the breakdown for:
- Federal income tax rates for 2020
- Standard deduction
- Alternative Minimum Tax
- Capital gains tax rates for 2020
- Retirement & tax-advantaged accounts
- Roth IRA Income Limits
- IRA Deduction Phaseouts
- Misc updates: state & local taxes, mortgage interest deduction, Child Tax Credit, estate tax, foreign earned income exclusion, Section 199A
1. Federal income tax rates for 2020
Single FilersIf you make... | ...your marginal rate is... | ...so you will be taxed |
---|---|---|
$0-9,875 | 10% | 10% of taxable income |
$9,875-40,125 | 12% | $987.50 + 12% of excess over $9,875 |
$40,125-85,525 | 22% | $4,617.50 + 22% of excess over $40,125 |
$85,525-163,300 | 24% | $14,605.50 + 24% of excess over $85,525 |
$163,300-207,350 | 32% | $33,271.50 + 32% of excess over $163,300 |
$207,350-518,400 | 35% | $47,367.50 + 35% of excess over $207,350 |
$518,400+ | 37% | $156,235 + 37% of excess over $518,400 |
If you make... | ...your marginal rate is... | ...so you will be taxed |
---|---|---|
$0-19,750 | 10% | 10% of taxable income |
$19,750-80,250 | 12% | $1,975 + 12% of excess over $19,750 |
$80,250-171,050 | 22% | $9,235 + 22% of excess over $80,250 |
$171,050-326,600 | 24% | $29,211 + 24% of excess over $171,050 |
$326,600-414,700 | 32% | $66,543 + 32% of excess over $326,600 |
$414,700-622,050 | 35% | $94,735 + 35% of excess over $414,700 |
$622,050+ | 37% | $167,307.50 + 37% of excess over $622,050 |
If you make... | ...your marginal rate is... | ...so you will be taxed |
---|---|---|
$0-9,875 | 10% | 10% of taxable income |
$9,875-40,125 | 12% | $987.50 + 12% of excess over $9,875 |
$40,125-85,525 | 22% | $4,617.50 + 22% of excess over $40,125 |
$85,525-163,300 | 24% | $14,605.50 + 24% of excess over $85,525 |
$163,300-207,350 | 32% | $33,271.50 + 32% of excess over $163,300 |
$207,350-311,025 | 35% | $47,367.50 + 35% of excess over $207,350 |
$311,025+ | 37% | $83,653.75 + 37% of excess over $311,025 |
If you make... | ...your marginal rate is... | ...so you will be taxed |
---|---|---|
$0-14,100 | 10% | 10% of taxable income |
$14,100-53,700 | 12% | $1,410 + 12% of excess over $14,100 |
$53,700-85,500 | 22% | $6,162 + 22% of excess over $53,700 |
$85,500-163,300 | 24% | $13,158 + 24% of excess over $85,500 |
$163,300-207,350 | 32% | $31,830 + 32% of excess over $163,300 |
$207,350-518,400 | 35% | $45,926 + 35% of excess over $207,350 |
$518,400+ | 37% | $154,793.50 + 37% of excess over $518,400 |
If you make... | ...your marginal rate is... | ...so you will be taxed |
---|---|---|
$0-2,600 | 10% | 10% of taxable income |
$2,600-9,450 | 24% | $260 + 24% of excess over $2,600 |
$9,450-12,950 | 35% | $1,904 + 35% of excess over $9,450 |
$12,950+ | 37% | $3,129 + 37% of excess over $12,950 |
2. Standard deduction for 2020
Standard Deduction + Personal ExemptionFiling Status | 2019 | 2020 |
---|---|---|
Single | $12,200 | $12,400 |
Married Jointly + Surviving Spouses | $24,400 | $24,800 |
Married Separately | $12,200 | $12,400 |
Head of Household | $18,350 | $18,650 |
Personal Exemption | $0 | $0 |
Additional standard deduction for 65 and older or blind taxpayers | $1,300 / married payer $1,650 / unmarried payer | $1,300 / married payer $1,650 / unmarried payer |
3. Alternative Minimum Tax
AMT is a Congress-enacted parallel tax system that is intended to ensure high earners don’t take too many itemized deductions to avoid their fair share of taxes. AMT requires taxpayers to compute their tax bill twice: once using regular tax rates, then again using AMT rates. You pay the higher of the two.
AMT uses a different definition of taxable income called Alternative Minimum Taxable Income (AMTI). Just like with the standard deduction, AMT lets you exempt a fixed amount from your AMTI. The 2020 exemptions amounts are:
AMT ExemptionsFiling Status | 2019 | 2020 |
---|---|---|
Single | $71,700 | $72,900 |
Married Jointly | $111,700 | $113,400 |
Married Separately | $55,850 | $56,700 |
Trusts & Estates | $25,000 | $25,400 |
However, the AMT exemption phases out for high earners at a rate of 25 cents per dollar earned after AMTI exceeds a certain threshold. Those thresholds for 2020 are:
AMT Exemption PhaseoutFiling Status | 2019 | 2020 |
---|---|---|
Single | $510,300 | $518,400 |
Married Jointly | $1,020,600 | $1,036,800 |
Married Separately | $510,300 | $518,400 |
Trusts & Estates | $83,500 | $84,800 |
AMT is charged at 26% of AMTI. However, once your AMTI exceeds a certain threshold, that rate increases to 28%. In 2020, the 28% rate applies to any AMTI exceeding…
AMT 28% Rate ThresholdsFiling Status | 2019 | 2020 |
---|---|---|
Single | $194,800 | $197,900 |
Married Jointly | $194,800 | $197,900 |
Married Separately | $97,450 | $98,950 |
Trusts & Estates | $194,800 | $197,900 |
Just like in 2019, that’s not a typo.
It’s $197,900 for EVERYONE except married filing separate.
4. Capital gains and qualified dividends tax rates for 2020
The 2017 Tax Cuts & Jobs Act changed the way capital gains and qualified dividends tax rates are calibrated. For 2020, the capital gains tax brackets are:
Capital gains tax ratesFiling status | 0% if taxable income less than or equal to... | 15% if taxable income between... | 20% if taxable income greater than... |
---|---|---|---|
Single Filers | $44,625 | $44,626 – $492,300 | $492,300 |
Married Joint + Surviving Spouses | $89,250 | $89,251 – $553,850 | $553,850 |
Married Filing Separately | $44,625 | $44,626 – $276,900 | $276,900 |
Head of Household | $59,750 | $59,751 – $523,050 | $523,050 |
5. Retirement & tax-advantaged accounts
If you have a retirement account or HSA, there are some increases to 401k and HSA contribution limits you should be aware of.
Also, remember the “Last Month Rule” for HSAs: if you’re enrolled in an HSA-eligible high-deductible health plan on December 1 of a given year, you are considered eligible to contribute the full-year maximum to an HSA for that year instead of simply making a 1-month pro rata contribution for December. However, if you do that you must stay covered by an HDHP through December 1 of the following year, or else risk tax penalties on your prior-year HSA contributions.
Contribution Limits for Retirement & Tax Advantaged AccountsAccount Type | 2019 | 2020 |
---|---|---|
401k, Roth 401k, Solo 401k, Solo Roth 401k, 403b, 457 plans | $19,000 | $19,500 |
Additional catchup contributions for age 50+ on ALL 401k varieties, 403b, and 457 plans | $6,000 | $6,500 |
IRA, Roth IRA plans | $6,000 | $6,000 |
Additional catchup contributions for age 50+ on IRA and Roth IRA plans | $1,000 | $1,000 |
SIMPLE 401k, SIMPLE IRA plans | $13,000 | $13,500 |
Additional catchup contributions for age 50+ on SIMPLE 401k and SIMPLE IRA plans | $3,000 | $3,000 |
Max contribution for ALL defined contribution plans: Solo 401k, Solo Roth 401k, SEP-IRA plans | $56,000 | $57,000 |
Individual HSA | $3,500 | $3,550 |
Minimum annual deductible for HSA’s High-Deductible Health Plan | $1,350 | $1,400 |
Max annual out-of-pocket limit for HSA’s High-Deductible Health Plan | $6,750 | $6,900 |
Family HSA | $7,000 | $7,100 |
Minimum annual deductible for family HSA HDHP | $2,700 | $2,800 |
Max annual out-of-pocket limit for family HSA HDHP | $13,500 | $13,800 |
6. Roth IRA Income Limits
Remember that Roth IRAs are subject to contribution limits based on how much income you earn. As your income increases, your max contribution decreases on a sliding scale, and it eventually goes to zero.
If your filing status is... | And your modified AGI is... | Then you can contribute to a Roth IRA... |
---|---|---|
married filing jointly or qualifying widow(er) | < $218,000 | $6,500 per spouse |
> $218,000 but < $228,000 | a reduced amount | |
> $228,000 | zero | |
married filing separately and you lived with your spouse at any time during the year | < $10,000 | a reduced amount |
> $10,000 | zero | |
single, head of household, or married filing separately and you did not live with your spouse at any time during the year | < $138,000 | $6,500 |
> $138,000 but < $153,000 | a reduced amount | |
> $153,000 | zero |
7. IRA Deduction Phaseouts
IRA contributions are tax-deductible; Roth IRA contributions are not.
IRA income limits may reduce the tax deductibility of your IRA contribution on a sliding scale as your income increases, eventually reducing your deduction to zero.
There are 2 versions of this deduction phaseout: (1) when you are covered by another retirement plan at work, and (2) when you are not.
If you are already covered by another retirement plan at work (which includes a SEP-IRA, SIMPLE, or Solo 401k), then the income limits for your IRA tax deductibility are:
If your filing status is... | And your modified AGI is... | Then for your IRA you can take... |
---|---|---|
married filing jointly or qualifying widow(er) | < $116,000 | full deduction up to contribution limit |
> $116,000 but < $136,000 | partial deduction | |
> $136,000 | no deduction | |
married filing separately and you lived with your spouse at any time during the year | < $10,000 | partial deduction |
> $10,000 | no deduction | |
single, head of household, or married filing separately and you did not live with your spouse at any time during the year | < $73,000 | full deduction up to contribution limit |
> $73,000 but < $83,000 | partial deduction | |
> $83,000 | no deduction |
On the other hand, if you are NOT covered by an existing retirement plan, then the income limits governing your IRA tax deductibility are:
If your filing status is... | And your modified AGI is... | Then for your IRA you can take... |
---|---|---|
single, head of household, qualifying widow(er), or married filing separately and you did NOT live with your spouse at any time during the year | No limit | full deduction up to contribution limit |
married filing jointly or separately + spouse is NOT covered by a plan at work | No limit | full deduction up to contribution limit |
married filing jointly + spouse IS covered by a plan at work | < $218,000 | full deduction up to contribution limit |
> $218,000 but < $228,000 | partial deduction | |
> $228,000 | no deduction |
8. Misc updates
- SALT. Deductions for state and local taxes and property taxes remain capped at $10,000 ($5,000 if married filing separately)
- Mortgage. Home mortgage interest deduction remains capped at $750,000 ($375k if married filing separately). Only acquisition mortgages count, i.e., used to purchase, build, or improve your home. Remember, you can only deduct mortgage interest in the first place if you itemize, which few people will do now given the drastically increased standard deduction.
- Child Tax Credit. The CTC is still $2,000 per kid. If you don’t have enough tax liability to avail the credit, you can get up to $1,400 refunded, subject to phaseouts. The MAGI-based phaseouts are not indexed for inflation. The phaseout begins at $400k married filing joint and ends at $440k, $200k for everyone else ending at $240k.
- Estate Tax. The estate tax exemption increases to $11,580,000 per deceased person, up from $11,400,000 per person in 2019.
- Foreign earned income exclusion. If you live abroad, the 2020 Foreign Earned Income Exclusion increases to $107,600, up from $105,900 in 2019 and $103,900 in 2018. I previously wrote about how to take advantage of the Foreign Earned Income Exclusion.
- Section 199A. Section 199A lets you take up to a 20% deduction from Qualified Business Income. However, it is subject to phaseouts. Once you exceed the phaseout, you cannot avail the 199A deduction if you are an SSTB. If you are not an SSTB, you might still be able to avail the deduction, but there will be some additional restrictions. The phaseout ranges are in the table below. Check out the in-depth post I wrote about the Tax Cuts & Jobs Act for much more detail on how Section 199A works.
Year | Married Filing Joint + Surviving Spouses | All other taxpayers |
---|---|---|
2020 | $326,600-426,600 | $163,300-213,300 |
2019 | $321,450-421,450 | $160,700-210,700 |
2018 | $315,000-415,000 | $157,500-207,500 |
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