Everything You Need To Know About the New 2020 Tax Rates

Everything You Need To Know About the New 2020 Tax Rates

An increase of 0.1% in the consumer price index was reported by the U.S Bureau of Labor Statistics for the month of August. It started rising to 0.3% last July. Let’s take a look at what this means for taxpayers in 2020. Bloomberg Tax & Accounting also showed there predicted rates calculations for the next year.

Your cost of living or the cost of goods and services is measured by the CPI. Using a “chained” CPI, the Internal Revenue Service (IRS) is able to determine the cost-of-living adjustments. It also measures consumer responses to higher prices instead of just measuring higher prices. Inflation adjustments, therefore, will appear smaller for taxpayers. The threshold dollar amounts for tax rate brackets for tax brackets are projected to rise by less than 1.5% in 2020 along with most inflation-adjusted amounts.

Annabelle Gibson, practice lead for U.S. income tax and IRS procedure, Bloomberg Tax & Accounting said most inflation-adjusted amounts this year are projected to have smaller increases because of the chained CPI to measure cost living adjustments. Another reason is because of the slower rise in inflation. These projections helped taxpayers and tax planners to have a great start on the 2020 tax planning season in advance of the Internal Revenue Service’s publication of official 2020 inflation-adjusted amounts that will happen this fall.

Beginning January 1, 2020, here are the projected numbers for the tax year 2020. Please note that these are not the tax rates and other numbers for 2019. 

  • Tax Brackets
  • Capital Gains

Although the rates for capital gains will not change for 2020, the rates for the brackets will change. A 20% tax rate applies to the extent that taxable income is more than the thresholds set for the 37% ordinary tax rate while most taxpayers pay a minimum 15% rate. 

  • Personal Exemption Amounts

There are no personal exemption amounts for 2020 as part of the Tax Cuts and Jobs Act (TCJA). Before you determined your taxable income, personal exemptions will be used to decrease it. You are generally allowed to have on exemption unless another taxpayer claimed you as a dependent. If you filed a joint return there will be one exemption for your spouse and one personal exemption for each of your dependents. However, TCJA has recently changed all of this.

The exemption amount is projected to be $4,250 ($4,300) if we look at the definition of a qualifying relative. Bloomberg Tax believes that the first amount, $4,250 is the literal application of the applicable IRC provision while the amount in parentheses is the amount they expect to be published by the IRS. You may want to visit the IRS website for more guidelines on qualifying relatives for purposes of the expanded child tax credit.

  • Standard Deduction

In 2018, the amount of the standard deduction doubled for most taxpayers as part of the TCJA. Those amounts remain the same for most taxpayers next year because of inflation. The projected standard deductions for 2020 are the following:

Furthermore, the standard deduction for an individual who may be claimed as a dependent by another taxpayer for 2020 is predicted to be not more than:

  • $1,100, or
  • the sum of $350 plus the individual’s earned income.

For old aged or blind taxpayers, the additional standard deduction will be $1,350. If the individual is also unmarried and not a surviving spouse, the additional standard deduction amount will increase to $1,650.

If you’re one of the many taxpayers who itemize their deductions and you’re a high-income earner, you used to be allowed to cap or phase out certain deductions using the Pease limitations, named after former Representative Don Pease (D-OH). 

Unfortunately, Pease limitations in 2020 will no longer be around as a result of the TCJA. There are rumors that the Congress wants to change that though.

There are obviously so many things you need to learn about this new law. But if you find the new tax brackets a bit confusing to understand, you may want to consider consulting a tax professional who can help calculate your taxable income and even file your tax return for you. 

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