By Russell W. Hall, CFP®

The IRS has announced updated tax brackets, the standard deduction, and other key tax numbers for 2020. Although as financial advisors in Orange County, CA, we’re interested in both the updated Internal Revenue Service numbers and California state income tax numbers, we’re focusing on only federal tax in this article.

One quick update before we dive in: This year’s Form 1040 has abandoned a bit of the “postcard” half-form used in 2018. It’s now two pages, and some income and deduction/credit items are broken out into additional detail. However, as with the 2018 tax return, many people should continue to expect a number of schedules and other forms backing up those front pages.

Tax Brackets

Below are the updated 2020 federal income tax brackets for taxpayers filing single or married filing jointly, or for an estate or trust. Tax rates ranging from 10% to 37% are unchanged from 2019. The income thresholds were increased a little for cost-of-living adjustments because of a higher Consumer Price Index (CPI), which means if your income in 2020 is the same as 2019, you’ll pay a little bit less in taxes.

Standard Deduction

The standard deduction for single filers increased by $200 to $12,400. For married filing jointly filers, the standard deduction was increased to $24,800. Taxpayers over the age of 65 (and the blind) get an additional standard deduction of $1,650 (single filers) or $1,300 (for each married taxpayer).

State and Local Tax (SALT) Deduction

For taxpayers who itemize on Schedule A instead of claiming the standard deduction, the state and local tax deduction is capped at $10,000 in 2020 (same as 2019). We have seen many planning opportunities for clients over 70 who are giving to charity but claiming the standard deduction (largely because of this SALT limitation). This financial planning article has more information about potential charitable giving strategies.

IRA and Roth IRA Contributions

The IRA and Roth IRA contribution limit is unchanged from last year, at $6,000. For taxpayers age 50 and over, an additional $1,000 catch-up contribution is allowed for a total of $7,000.

Contributions to Roth IRAs are limited (or disallowed) for taxpayers with an income greater than $124,000 (single) or $196,000 (married filing jointly).

IRA contributions are fully deductible when an individual is not covered by an employer’s retirement plan. But if a single taxpayer is covered by a retirement plan, an IRA deduction is fully deductible only if income is less than $65,000.

For a married couple with one spouse covered by a retirement plan, income must be less than $104,000 for the covered spouse to qualify for the full IRA deduction. For the non-covered spouse to take the full deduction, income must be less than $196,000.

Contributions to employer retirement plans and IRAs qualify for a saver’s tax credit if income is less than $32,500 (single) or $65,000 (married filing jointly). The credit can be worth up to $1,000 per taxpayer, depending on income limits.

Qualified Retirement Plan Contributions

Participants in 401(k), 403(b), and 457 retirement plans may make elective salary deferrals of up to $19,500 in 2020. For participants age 50 and over, an additional $6,500 catch-up contribution is allowed for a total of $26,000.

Participants in SIMPLE IRA and SIMPLE 401(k) retirement plans may make elective salary deferrals of up to $13,500 in 2020. For SIMPLE plan participants age 50 and over, an additional $3,000 catch-up contribution is allowed for a total of $16,500.

The limit on annual additions to defined contribution retirement plans was increased to $57,000.

Personal Exemption

The Tax Cuts and Jobs Act eliminated the personal exemption for all taxpayers effective 2018. This exemption was previously a $4,050 deduction for taxpayers who met certain income requirements.

Child Tax Credit

A credit of $2,000 is available for every qualifying child (dependent and under age 17) in a household. However, this credit begins to be phased out as income exceeds $200,000 (single) or $400,000 (married filing jointly).

There is also a separate $500 credit for other dependents, including children older than 16 or other dependent individuals (like parents). This will also be phased out at the same income limitations as the Child Tax Credit.

Qualified Business Income Deduction (Section 199A)

Owners of pass-through businesses can take a 20% deduction against up to $163,300 (single) or $326,600 (married filing jointly) of qualified business income.

Capital Gains

Long-term capital gains tax rates are unchanged in 2020; however, the tax brackets have been updated:

Note that the Medicare surtax introduced by Obamacare includes capital gains in the definition of net investment income. So, when you realize capital gains with income over $200,000 (single) or $250,000 (married filing jointly), there is a 3.8% tax in addition to the tax rates shown above.

Health Insurance Penalty

Starting in 2019, the penalty for not maintaining health insurance coverage was eliminated. This was referred to as the individual mandate under Obamacare. In 2018 and earlier, this penalty could add up to hundreds or even thousands of dollars for uninsured individuals and families.

Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) uses a different set of rules to recalculate taxable income. If the tax owed by AMT is higher than a taxpayer’s regular tax liability, then the taxpayer will pay the higher amount.

The AMT exemption amount in 2020 is $72,900 (single) or $113,400 (married filing jointly). However, this exemption starts to phase out for taxpayers with income over $518,400 (single) or $1,036,800 (married filing jointly).

The AMT is assessed at two tax rates based on income: 26% and 28%.

Gift and Estate Tax

Gifts of up to $15,000 (unchanged from 2019) to any person can be made in 2020 without needing to file a gift tax return.

The unified gift and estate tax exclusion in 2020 is increased to $11.58 million. This means that a married couple can gift and/or pass through their estate up to $23.16 million without paying any gift and estate taxes. The tax rate of 40% is unchanged from 2019.

Social Security

For taxpayers who are still working, compensation of up to $137,700 is subject to FICA taxes for Social Security. The tax rate of 6.2% is unchanged.

For current recipients of Social Security benefits ages 62–66 who are still working, an earnings test is applied. The maximum amount one can earn without having benefits reduced is $18,240 in 2020.

Recipients of Social Security received a 1.6% cost of living adjustment in 2020.

Medicare Premiums

Medicare Part B premiums are set based on income. The standard premium for Part B has increased to $144.60 per month, while taxpayers with income greater than $87,000 (single) or $174,000 (married filing jointly) are charged higher premiums. Note that your 2020 premium amount is based on information from your 2018 tax return.

Whether we’re doing financial planning for retirement or financial planning and analysis to help our clients start a family, taxes are a key consideration. As fiduciary financial advisors in Fullerton, Eclectic Associates is concerned with what you keep after taxes.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.