Can you believe it is almost year-end AGAIN?
The IRS recently released the updated rates and limitations for 2020. I won’t go over all of them— there are over 60, and many of them don’t apply to most of us.
- Increases $400 for Married, Filing Jointly to $24,800.
- Increases $200 for Single to $12,400.
- Increases $300 for Head of Household to $18,650.
The Tax Cut and Jobs Act significantly increased the standard deduction, which for many people makes it hard to itemize, especially since state and local taxes are limited to $10,000. If you make an annual contribution to a charity, consider loading up 2 or 3 years in one year to allow you to itemize, and take the standard deduction in the two years you don’t contribute.
IRA & Roth IRA Contribution Limits:
- Unchanged for 2020. Still $6,000, with an additional $1,000 for taxpayers over 50.
- Increases $500 to $19,500.
- 50 or older “catch-up” contribution increases $500 to $6,500.
If you are over 50, you can contribute $26,000 to your 401(k). Since you can start taking distributions at 59-½, even if you feel like your retirement savings are in pretty good shape, you could treat the new contributions to your 401(k) as a kind of short-term tax-free savings account. Particularly if you are an older parent and will have kids in college, this approach is much more flexible than a 529 college fund.
FICA Wage Base
- Increases $4,800 to $137,700.
If you are a high wage-earner and you change jobs in the middle of the year, you could end up having FICA withheld on your total salary in excess of $137,700. Don’t panic — you get it back when you file your tax return.
Qualified Business Income Deduction
The threshold for phase-out of the Section 199A business income deduction (20% deduction):
- $326,600 for married filing joint (up from $315,000).
- $163,300 for all other filers (up from $157,500).
For a Specified Service Trade or Business (SSTB), such as accounting, law, and consulting, the deduction can be phased out to zero. But for companies that are not SSTB’s, the phase-out can never reduce your deduction to less than 50% of company salaries or 25% of salaries plus 2.5% of undepreciated assets. You could have some planning opportunities in your business to increase your salary to further boost your Section 199A deduction if your are above the income thresholds.
Individual Tax Rates
Married, Filing Jointly:
- 22% bracket starts at $80,250, up from $78,951.
- 24% bracket starts at $171,050, up from $168,401.
- 32% bracket starts at $326,600 up from $321,561.
- 22% bracket starts at $40,125, up from 39,475.
- 24% bracket starts at $85,525, up from $84,201.
- 32% bracket starts at $163,300, up from $160,726.
The reality is there isn’t a ton you can do about your income, particularly if you are a W-2 employee. Your best options are deferring wages into tax-deferred accounts such as 401(k), Health Savings Accounts, etc.
You still have time to get your year-end affairs in order! But you don’t have long. Reach out to us now and you’ll start 2020 feeling better about your tax future.