The 2019 tax season is barely underway, and the IRS has already released the new tax brackets for the 2020 tax year, so now you can start thinking about how to handle your 2020 finances in a tax-efficient way. The seven 2020 tax rates themselves didn't change (they are the same as those in effect for the 2019 calendar year). However, the tax bracket ranges were modified based on inflation. So, you could be in a different tax bracket for 2020 than the last time you reported your taxes, even if your income has not changed.
Tax Brackets Are Marginal
The IRS divides income into different tax rates. Each subsequent portion of your income will have an increased tax rate. For example, if you make $40,125 in 2020, your first $9,875 will be taxed at 10 percent. The next portion of your income will be taxed at an increased rate; from $9,875 to $40,125, your tax rate will be 12 percent.
As your income increases, you'll fall into higher tax brackets and will have a higher tax rate for each portion of your income.
Why Would My Tax Bracket Be Different?
The IRS regularly adjusts tax brackets taking inflation into consideration. This is because, with inflation, people face higher prices of everyday goods, meaning the purchasing power of their dollar is decreased. Knowing this, the IRS adjusts brackets in order to avoid bracket creep, a circumstance that occurs when inflation pushes your income into a higher tax bracket, or credits and deductions are reduced. In this scenario, an individual may not actually have increased purchasing power or higher disposable income, even with an increase in wages and salaries.
2020 Tax Brackets
Here are the 2020 tax brackets according to your filing status and income from the IRS:
10% Tax Rate
- Single Individuals: from $0 to $9,875
- Married Individuals Filing Jointly: from $0 to $19,750
- Heads of Households: from $0 to $14,100
- Married Individuals Filing Separately: from $0 to $9,875
12% Tax Rate
- Single Individuals: from $9,876 to $40,125
- Married Individuals Filing Jointly: from $19,751 to $80,250
- Heads of Households: from $14,101 to $53,700
- Married Individuals Filing Separately: from $9,876 to $40,125
22% Tax Rate
- Single Individuals: from $40,126 to $85,525
- Married Individuals Filing Jointly: from $80,251 to $171,050
- Heads of Households: from $53,701 to $85,500
- Married Individuals Filing Separately: from $40,126 to $85,525
24% Tax Rate
- Single Individuals: from $85,526 to $163,300
- Married Individuals Filing Jointly: from $171,051 to $326,600
- Heads of Households: from $85,501 to $163,300
- Married Individuals Filing Separately: from $85,526 to $163,300
32% Tax Rate
- Single Individuals: from $163,301 to $207,350
- Married Individuals Filing Jointly: from $326,601 to $414,700
- Heads of Households $163,301 to $207,350
- Married Individuals Filing Separately: from $163,301 to $207,350
35% Tax Rate
- Single Individuals: $207,351 to $518,400
- Married Individuals Filing Jointly: from $414,701 to $622,050
- Heads of Households: from $207,351 to $518,400
- Married Individuals Filing Separately: from $207,351 to $311,025
37% Tax Rate
- Single Individuals: over $518,400
- Married Individuals Filing Jointly: over $622,050
- Heads of Households: over $518,400
- Married Individuals Filing Separately: over $311,025
In addition to the tax inflation adjustments, the IRS also altered standard deductions. The standard deduction amounts will increase to $12,400 for individuals and married couples filing separately $18,650 for heads of household, and $24,800 for married couples filing jointly and surviving spouses.
For 2020, a married filer who is blind or age 65 and over can claim an additional $1,300 deduction. Two married filers who are both over 65 or blind can claim $2,600 collectively, unchanged from 2019. Single filers who are blind or over 65 are eligible for a $1,650 additional standard deduction, up to $50 from 2019.
For 2020, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 or the sum of $350 and the individual's earned income (not to exceed the regular standard deduction amount).
Capital Gains Rates
Capital Gains rates will not change for 2020, but the brackets for the rates will change. Most taxpayers pay a maximum 15% rate, but a 20% tax rate applies if your taxable income exceeds the thresholds set for the 37% ordinary tax rate. Exceptions also apply for art, collectibles, and real estate transactions.
While the above rates and brackets are at the federal level, different states might have varying brackets and rates.
Financial Planning & Taxes
Understanding where your income falls within the tax system is the first step in tax planning. Once you know your tax bracket, you have an opportunity to make informed decisions on whether you should accelerate or decelerate income during a tax year to avoid being pushed into a higher tax bracket. This is tax planning in action.
Managing your income helps you pay fewer taxes and maximizes the benefit you receive from several taxpayer programs, including Medicare, student loan repayment plans, and college aid programs, all of which are dependent on the taxpayers' income to calculate benefits. Additionally, depending on how much income you generate, you may end up paying special IRS surtaxes. These taxes include the Net Investment Income Tax, increased capital gains tax, and even the dreaded Alternative Minimum Tax.
At Thirty Mile Financial, part of our financial planning service is to review your tax situation and make recommendations that may save you on your taxes. As part of our financial planning engagement, we'll review your IRS Form 1040 and will help you understand your tax profile. Understanding how much income you're generating, the characterization of the income, and the type of taxes you're paying allows you to make smarter financial decisions. Also, as our relationship develops, we'll assist you in making informed financial choices from a tax perspective. This will help you avoid paying excess taxes and keep you from making tax mistakes when faced with new opportunities and challenges.
If you have questions about your tax situation or if you like to review your finances with a CERTIFIED FINANCIAL PLANNER™ professional, please schedule an appointment using our contact page or scheduling application.