Updated 2020 Inflation-Adjusted Items for Individuals’ Tax Planning

The IRS released the inflation-adjusted items for 2020 for various provisions of the Internal Revenue Code. Read on for highlights on the updated 2020 amounts as well as the respective 2019 figures for comparison (skip to the end for 2019 and 2020 federal income tax rates). Rates that stayed the same from 2019 to 2020 are not included in the scope of this alert.
 

Individuals’ Tax Planning Highlights for 2020

Social Security Tax

  • The old age, survivors, and disability insurance (OASDI) portion of the social security tax is imposed on employee compensation and self-employment income, except that this tax is imposed only to the extent of the maximum wage base set by the Social Security Administration ($132,900 for 2019 and $137,700 for 2020).

The OASDI program is funded by contributions from employees and employers through FICA tax, which is based on 6.2% of the employee's gross pay. Both employees and employers contribute equal amounts. Self-employed business owners also pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.

  • Employers, employees and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%.  
  • Some high-earners must pay an extra 0.9% HI payroll tax on earned income that is above certain adjusted gross income (AGI) thresholds – i.e., $200,000 for individuals, $250,000 for couples and $125,000 for spouses filing separately. But employers do not pay that extra tax.


Long-term Care Insurance and Services

  • Premiums you pay on a qualified long-term care insurance policy are deductible as a medical expense. The maximum amount of your deduction is determined by your age. The following table sets forth the deductible limits for 2019 and 2020:

 

Age

Deduction Limitation 2019

Deduction Limitation 2020

40 or less

$420

$430

More than 40 but not more than 50

$790

$810

More than 50 but not more than 60

$1,580

$1,630

More than 60 but not more than 70

$4,220

$4,350

More than 70

$5,270

$5,430

 
These limitations are per person, not per return. Thus, a married couple over 70 years old has a combined maximum deduction of $10,540 ($10,860 in 2020), subject to the applicable AGI limit.
 
Retirement Plan Contributions

  • If your employer (including a tax-exempt organization) has a 401(k) plan or 403(b) plan, the maximum amount of elective contributions that you could make in 2019 was $19,000 ($25,000 if you were age 50 or over and the plan allowed “catch up” contributions which gave you an additional $6,000). For 2020, your maximum elective contribution limit increases to $19,500 ($26,000 if you are age 50 or over and the plan allows “catch up” contributions, which gives you an additional $6,500).

 
Capital Gains

  • The brackets for long-term capital gains for 2019 and 2020 are shown below. Long-term capital gains have a lower tax rate, so investors may consider holding on to assets for over a year to qualify for those taxable rates.

 

Long-Term Capital Gains Tax Rate

Single

Joint

Head of Household

2019

2020

2019

2020

2019

2020

0%

$0 - $39,375

$0 -  $40,000

$0 -  $78,750

$0 -  $80,000

$0 -  $52,750

$0 -  $53,600

15% minimum income

$39,376 - $434,550

$40,001 - $$441,450

$78,751 - $488,850

$80,001 - $496,600

$52,751 - $461,700

$53,601 - $469,050

20% minimum income

$434,551 ad above

$441,451 and above

$488,851 and above

$496,601 and above

$461,701 and above

$469,051 and above

 
 
Foreign Earned Income Exclusion

  • The foreign earned income exclusion is $105,900 in 2019. For 2020, the exclusion increases to $107,600.

 
Excess Business Loss Limitation

  • Under Section 461(l), a taxpayer will only be able to deduct net business losses of up to $250,000 in 2019 and $259,000 in 2020 (joint filers can deduct $500,000 in 2019 and $518,000 in 2020) for taxable years beginning after December 31, 2017, and before January 1, 2026. Excess business losses are disallowed and added to the taxpayer’s net operating loss carryforward.

 
Alternative Minimum Tax

  • A taxpayer must pay either the regular income tax or the AMT, whichever is higher. The established exemption amounts for 2019 are $71,700 for unmarried individuals and individuals claiming the head of household status, $111,700 for married individuals filing jointly and surviving spouses, and $55,850 for married individuals filing separately. For 2020, those amounts increase to $72,900 for unmarried individuals and individuals claiming the head of household status, $113,400 for married individuals filing jointly and surviving spouses, and $56,700 for married individuals filing separately.
  • The exemption for estate and trusts is $25,000 in 2019 and increases to $25,400 in 2020.

 
Estate and Gift Taxes

  • The gift exemption and generation-skipping transfer tax exemption is $11,400,000 ($22,800,000 for married couples) in 2019. For 2020, the exemption increases to $11,580,000 ($23,160,000 for married couples).

 
Year-end and Other Gifts, and Portability

  • The lifetime exemption (made available in the form of a credit against tax based on an exemption-equivalent amount) allows each person to transfer $11,400,000 for 2019, and $11,580,000 for 2020, by gift, without incurring any gift tax liability (reduced by the amount of any lifetime exemption that may have been used in a prior year).
  • All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2019 and 2020, only the first $155,000 and $157,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year.

 
Simplified Employment Pension Plans

  • Small businesses can contribute up to 25% of employees’ salary (up to an annual maximum set by the IRS each year) to a Simplified Employee Pension (SEP) plan. The SEP contribution must be made by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2019 was $56,000. The maximum SEP contribution for 2020 is $57,000.
  • The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).


Section 179 Business Expense

  • For business assets that qualify, Section 179 expense allows you to deduct the full cost of depreciable assets in the taxable year they are placed in service subject to an expense level of $1,020,000 and the phaseout threshold amount commences at $2,550,000 for 2019. The Section 179 expense level increases to $1,040,000 and the phaseout threshold increases to $2,590,000 in 2020.

 
Higher Education Costs

  • For taxable years beginning in 2019, the Lifetime Learning Credit modified adjusted gross income limitation is $58,000 for single filers and $116,000 for joint filers. For taxable years beginning in 2020, those limitations increase to $59,000 for single filers and $118,000 for joint filers.

 

2020 Federal Income Tax Rates

Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estate & Trusts

10%

$0 - $19,750

$0 - $9,875

$0 - $14,100

$0 - $9,875

$0 - $2,600

12%

$19,751 -   $80,250

$9,876 - $40,125

$14,101 - $53,700

$9,876 - $40,125

-

22%

$80,251 - $171,050

$40,126 - $85,525

$53,701 - $85,500

$40,126 - $85,525

-

24%

$171,051 - $326,600

$85,526 - $163,300

$85,501 - $163,300

$85,526 - $163,300

$2,601 -  $9,450

32%

$326,601 - $414,700

$163,301 - $207,350

$163,301 - $207,350

$163,301 - $207,350

-

35%

$414,701 - $622,050

$207,351 - $518,400

$207,351 - $518,400

$207,351 - $311,025

$9,451 - $12,950

37%

Over $622,050

Over $518,400

Over $518,400

Over $311,025

Over $12,950

 

2019 Federal Income Tax Rates

Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

10%

$0 – $19,400

$0 – $9,700

$0 – $13,850

$0 – $9,700

$0 – $2,600

12%

$19,401 –   $78,950

$9,701 – $39,475

$13,851 – $52,850

$9,701 –  $39,475

-

22%

$78,951 – $168,400

$39,476 – $84,200

$52,851 – $84,200

$39,476 – $84,200

-

24%

$168,401 – $321,450

$84,201 – $160,725

$84,201 – $160,700

$84,201 – $160,725

$2,661 – $9,300

32%

$321,451 – $408,200

$160,726 – $204,100

$160,701 – $204,100

$160,726 – $204,100

-

35%

$408,201 – $612,350

$204,101 – $510,300

$204,101 – $510,300

$204,101 – $306,175

$9,301 – $12,750

37%

Over $612,350

Over $510,300

Over $510,300

Over $306,175

Over $12,750

 


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