Well, 2019 is in the history books and we’re now looking to 2020. It’s never too early to think about taxes and its impact on our financial planning. The following are some of the changes for 2020.
Income tax brackets
The 2020 income tax brackets will be slightly wider than they were in 2019. This is because of the rate of inflation from September 2018 through August 2019. For example, the tax for married filing joint for 2020, assuming taxable income is over $171,050—but not more than $326,600—is $29,211 plus 24 percent of the excess over $171,050. For 2019, the tax in the 24 percent bracket assuming taxable income is over $168,400—but not more than $321,450—is $28,754 plus 24 percent over $321,450.
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The standard deduction for 2020 will go up slightly. For example, married couples will receive $24,800 plus $1,300 for each spouse, age 65 or older. So, a married couple most probably will not itemize for federal tax income tax purposes unless they have substantial medical expense and are charitable.
Long-term capital gains and qualified dividends
The tax rates on long-term capital gains and qualified dividends don't change, but the income thresholds go up.
The alternative minimum tax exemption
The AMT exemption goes up for 2020. For example, for married couples the exemption goes up to $113,400. The phaseout zones also go up—the point where there is no exemption—to $1,036,800. The AMT tax rate will also go up slightly for 2020.
Lifetime estate and gift tax exemption
The lifetime estate and gift tax exemption for 2020 goes up to $11,580,000. If portability is elected, this goes up to $23,160,000 for couples. The gift tax exemption remains at $15,000 per donee. You can gift up to $15,000—$30,000 if your spouse agrees—to children, grandchildren any other person, related or not, in 2020 without filing a gift tax return. However, my advice is to file the return, because no tax is due.
The Kiddie tax
Some good news from Congress. Prior to 2018, children under 18—or under 24 if a student—were taxed on unearned income in excess of certain amounts at the tax rate of their parents. For 2018, the tax law changed the pre-2018 tax rates to the tax rates applicable to trusts. Without going into detail, the impact of this change increased the amount of the Kiddie tax. Congress subsequently changed the new rates applicable to the Kiddie tax to the pre-2018 law. Accordingly, taxpayers can elect to apply the pre-2018 law to 2018 and 2019 tax returns. This may require amending the 2018 tax return.
The college savings plans can now be used to pay for fees, books, supplies and equipment for enumerated apprenticeship programs. Also, up to $10,000 in total can be used to pay off or down student loans.
The Social Security annual wage base
The wage base for social security is now $137,700 for 2020 up by $4,800.
Owners of limited liability companies, S corporations, and other pass-through entities (a partnership for example) can deduct 20 percent of their qualified business income subject to limitations with taxable income in excess of $326,600 for joint filers and $163,300 for all others. There’s a new form that must be completed: Form 8995 or Form 8995-A.
Section 179 expenses of equipment
For 2020, $1,040,000 of assets can be expensed. This amount will phase out dollar for dollar when $2,590,000 of assets are placed in service.
Electing the cash method of accounting
For taxable years beginning in 2020, C corporations with average annual gross receipts of $26 million or less over the previous three years can use the cash method of accounting. Businesses should consider speaking with their CPA or other tax advisor.
The threshold for deducting medical expenses is 7.5 percent.
The standard mileage rate drops to 57.5 cents per mile.
The Obamacare excises taxes are repealed.
The limits on deducting long-term premiums are higher in 2020.
The annual cap o deducting contributions to HSAs rises.
The fine for filing a late tax returns 60 days after the due date has been increased.
The Secure Act
The President signed a new law called the Secure Act. The purpose of the law is to increase retirement savings. Next month’s column will review many of these changes.
Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.