The Internal Revenue Service adjusts for inflation each year. Tax year 2020 is no different.
Details for the 2020’s annual inflation adjustment are in Revenue Procedure 2019-44, although it can be difficult to follow for someone who isn’t familiar with tax terminology. For this reason, we’ve decided to break it down in layman’s terms to help taxpayers understand what the changes are and how to use them to file.
The tax law changes were part of the Taxpayer First Act of 2019. Those who fail to file their due taxes before the end of 2019 must now pay a penalty of $330, which is an increase for previous years. The next time this penalty will be adjusted for inflation will be 2021.
A standard deduction is the portion of income that is not taxable, which can decrease your tax liability. You can also use the standard deduction if you do not itemize your deductions using Schedule A Form 1040.
The standard deduction for those who file “married filing jointly” has increased by $400 to $24,800 for 2020.
Standard deduction for single taxpayers or married filing separately for 2020 is up $200 to $12,400 for 2020.
Heads of households will enjoy an increase of $300 for a total of $18,650 in the standard deduction.
Marginal rates are the rates at which tax incurs an additional dollar of income. Marginal tax rates increase as income increases. This taxation method, also called progressive taxation, taxes lower-income individuals less than those with a higher income.
The tax rate is staying the same in 2020.
37% Income > $518,400 Income > $622,050
35% Income > $207,350 Income > $414,700
32% Income > $163,300 Income > $326,600
24% Income > $85,525 Income > $171,050
12% Income > $9,875 Income > $19,750
10% Income < $9,875 Income < $19,750
The Alternative Minimum Tax exemption is $72,900, which is $1,200 more than tax year 2019. Phase-out happens at $518,400 for single taxpayers and 1,036,800 for joint filers.
Earned income credit is $6,660 for three or more children, which is an increase of $103.
The monthly limitation for this benefit is $270, which is $5 more than in 2019.
Dollar limitation for employee salary reductions for health spending is $2,750, which is also an increase of $50 from 2019.
Medical Savings Account has an annual deduction of no less than $2,350 - the same as in 2019 - but no more than $3,550. The maximum out-of-pocket expense amount is $4,750. Family coverage deductible is $4,750 and out-of-pocket expenses of $8,650.
The adjusted gross income amount for joint filers is $118,000, which is $2,00 more than tax year 2019.
A tax exclusion is income taxpayers are not required to include in gross income when calculating income. Income from a benefit, gift, or inheritance can be excluded up to a specific amount.
Foreign income exclusion was $105,900 for 2019, and it’s increased in 2020 to $107,600.
Estates of those who deceased in 2020 have a basic exclusion amount of $11,580,000. This is an increase of $180 from 2019.
The annual exclusion for gifts is $15,000.
Those who have adopted a child can apply a maximum credit for the adoption of $14,300, which is $220 more than in 2019.
Knowing the tax laws for each year will help you pay what you owe, so you don’t overpay or underpay. For many people, the above information may still be confusing, which can lead to tax mistakes. The best way to ensure your taxes are filed correctly is to utilize the services of a professional tax preparer. Contact us today for help with your taxes, so you can make sure you’re not paying more or risk getting audited for not paying enough.