IRS Publishes Inflation Adjustments for 2020

The IRS has announced the tax year 2020 annual inflation adjustments, including the tax rate schedules and other tax items. Learn how it may affect you.

As it typically does, the IRS has made inflation adjustments for various tax items for the coming year — 2020. More details can be found in Rev. Proc. 2019-44. Below are the adjustments that apply to a wide range of taxpayers.

Inflation Adjustments

The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 for 2020, up $200, and for heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.

The personal exemption for tax year 2020 remains at 0, as it was for 2019. This elimination of the personal exemption was a provision of the Tax Cuts and Jobs Act.

Marginal rates: For tax year 2020, the top tax rate remains 37% for individual single taxpayers with incomes higher than $518,400 ($622,050 for married couples filing jointly). The other rates are:

  • 35% for incomes over $207,350 ($414,700 for married couples filing jointly).
  • 32% for incomes over $163,300 ($326,600 for married couples filing jointly).
  • 24% for incomes over $85,525 ($171,050 for married couples filing jointly).
  • 22% for incomes over $40,125 ($80,250 for married couples filing jointly).
  • 12% for incomes over $9,875 ($19,750 for married couples filing jointly).
  • The lowest rate is 10% for single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

For 2020, as in 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

inflation adjustments

Additional Inflation Adjustments

The alternative minimum tax exemption amount for tax year 2020 is $72,900, and it begins to phase out at $518,400 ($113,400 for married couples filing jointly, for whom the exemption begins to phase out at $1,036,800). The 2019 exemption amount was $71,700, and began to phase out at $510,300 ($111,700, for married couples filing jointly, for whom the exemption began to phase out at $1,020,600).

The new maximum earned income credit amount is $6,660 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,557 for tax year 2019.

The qualified transportation fringe benefit now has a monthly limitation of $270. The monthly limitation for qualified parking is the same, up from $265 for tax year 2019.

The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.

The annual exclusion for gifts is $15,000 for calendar year 2020, as it was for calendar year 2019.

This is not a comprehensive list, and there are subtleties that you should discuss with a professional in the new year.

© 2019

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How to Avoid the Top 10 Estate Planning Errors

Estate planning can get very complicated, and by the time you realize you’ve made a mistake, it may be too late. Learn more and be prepared.

There are myths and misconceptions about estate planning. Here are the top common mistakes to avoid and help your family save thousands of dollars in unnecessary taxes and probate fees:

Estate Planning Errors to Avoid

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1. Beneficiary omissions — Not naming contingent beneficiaries or failing to review beneficiaries often enough. This may subject your estate to probate, creditors and delays.

2. No stretch IRA — No contingent beneficiary on an IRA may mean there is no stretch IRA, a valuable tax break that enables someone who inherits an IRA to draw out distributions over his or her life expectancy if the original beneficiary has died.

3. Forgetting to change an ex-spouse on an IRA — Your new spouse becomes your beneficiary the day you get married, but not in an IRA. This can have disastrous consequences for your new spouse and family.

Minors, Ownership, and Residuary Clause in Estate Planning

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4. Leaving assets directly to a minor without dealing with guardianship issues — Who will handle their inheritance? The phrase “for their benefit” welcomes a whole host of potentially abusive interpretations.

5. Ownership mistakes and imbalances — If too many assets are in one spouse’s name, it could wreak havoc with tax planning. One spouse may have a much larger IRA and own a vacation house in his or her name only. By shifting the house or investment to the other spouse, the estate becomes more equalized, possibly reducing taxes.

6. Not having a residuary clause — A residuary clause covers items not named in a will or included in a trust. These can include items you don’t yet own but will before your death. Sometimes there are things you might not even know you own.

7. Not planning for the unexpected — There are a multitude of things that could happen, such as a sudden decline in your spouse’s health or a change in your assets. You can address this by having assets go to a trust. You can control how, to whom and when money gets distributed.

What Estate Planning Brings Up

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8. Not dealing with your own mortality — Don’t leave your family ruined because you don’t want to admit to yourself that you are going to die someday. Don’t make matters worse by failing to plan.

9. Not updating your will — Many changes take place within a family or business structure. Ensure the assets you leave behind are given to the people you intended to have them.

10. Not planning for disability — An unexpected long-term disability can affect your personal and financial affairs in myriad ways. Decisions such as who will handle your finances, raise your children or make health care decisions on your behalf are essential. It may be necessary to appoint a power of attorney or create a living trust to work on your behalf if you’re unable to do it for yourself.

Benefits of Estate Planning

You can benefit from having an estate plan. Not only can it help maximize the actual value of the estate you pass on to your heirs and beneficiaries, but you’ll also have an opportunity to make informed decisions concerning how your assets should be handled while you are still alive.

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Strategic Tax Planning and Itemizing

Why use good tax planning? The changes made by the Tax Cuts and Jobs Act of 2017 continue to make itemizing deductions out of reach for most taxpayers.

The Tax Cuts and Jobs Act of 2017 (TCJA) made major changes that affect how individual taxpayers can claim deductions. For individual taxpayers, the biggest changes were (1) the increase in the standard deduction, which significantly raised the threshold for claiming itemized deductions; (2) the elimination of some itemized deductions (e.g., moving expenses) and the higher cap on others (e.g., the jump to 10 percent threshold for medical expenses to be deductible); (3) the $10,000 cap for state and local taxes; and (4) the much higher estate tax exemption.

Changes to Tax Planning

The result is that only about 10 percent of American households can itemize their deductions. This may change in 2025 when some of the changes made by the TCJA are scheduled to sunset, if they aren’t made permanent before then.

Despite these changes, good tax planning may make it possible to itemize deductions in some areas. There is a caveat: it may be possible to itemize only in alternate years or if there is an exceptional life event.

The following four deductions may make it possible for taxpayers to exceed the standard deduction and itemize:

Medical Expenses

Medical expenses are deductible to the extent they exceed 10 percent of adjusted gross income (AGI). For most people, health insurance covers most of the expense and their out-of-pocket expenses won’t meet the threshold. Some exceptions, however, may make it possible to exceed it:

  • Long-term care is expensive, and it usually isn’t covered by insurance.
  • Dental and orthodontic costs are allowed. Many people either don’t have dental insurance or the insurance doesn’t cover the entire expense.
  • Major health events with noncovered expenses. Noncovered drugs and other unforeseen expenses can be deducted.

Depending on your particular situation, expenses like these may put you over the threshold, either annually or in intermittent years. Keep in mind that even with this, you must still exceed the standard deduction ($12,200 for individuals and $24,400 for married individuals filing jointly in 2019) to be able to itemize.

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State and Local Taxes (SALT)

The $10,000 cap on the SALT deduction applies to both individual and joint filers. Consequently, all taxpayers who reach that cap are $10,000 closer to the standard deduction — which means that for 2019 single taxpayers are nearly to their $12,200 standard deduction and joint filers are almost halfway to their $24,400 standard deduction threshold. These taxpayers should pay close attention to their other deductions. When they are all “bundled” together, the threshold may be met.

Charitable Giving

Depending on income and level of giving, it may be possible to take this deduction annually. Donors who don’t give enough to meet the standard deduction threshold still have options: they can make their donations every second or third year (depending on their budget), or they can contribute to donor-advised trusts, which allow donors to take a deduction in the year of the gift and designate charities as recipients later. These trusts generally have fees.

Other Deductions

It may be possible to itemize other deductions as well, including miscellaneous deductions not subject to the 2 percent AGI floor (e.g., gambling losses), interest paid for investment purposes and Ponzi scheme losses.

Most taxpayers don’t have enough in itemized deductions to claim them annually. With good tax planning, however, it may be possible to claim them in intermittent years. Schedule a consultation today for other tax-planning strategies.

©2019

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