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Tax items for tax year 2020 of greatest interest to most taxpayers



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Tax items for tax year 2020 of greatest interest to most taxpayers

Credit: TaxSpeaker.  Taxspeaker® provides education to tax, legal and financial professionals in all 50 states, as well as several foreign countries. As the only continuing education company whose manuals ever won the coveted CPA Practice Advisor Reader’s Choice Award (4 years in a row!), Taxspeaker® is known for its industry-leading manuals, expert and energetic speakers, and award-winning research and compliance checklists and guides.
To learn more, visit TaxSpeaker.com.

The tax items for the tax year 2020 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married filing jointly rises to $24,800 for the tax year 2020, up to $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 in 2020, up $200, and for heads of households, the standard deduction will be $18,650 for the tax year 2020, up $300.
  • The personal exemption for the tax year 2020 remains at 0, as it was for 2019, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
  • Marginal Rates: For tax year 2020, the top tax rate remains 37% for individual single taxpayers with incomes greater 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).
    • Remember the 20% capital gains rate applies to individuals in the marginal 37% bracket.
    • Individuals in the 10% and 12% bracket have a 0% capital gains rate.
    •  The lowest rate is 10% for incomes of 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.
  • The Alternative Minimum Tax exemption amount for the tax year 2020 is $72,900 and 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 tax year 2020 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 the tax year 2019. The revenue procedure contains a table providing maximum credit amounts for other categories, income thresholds, and phase-outs.
  • For the tax year 2020, the monthly limitation for the qualified transportation fringe benefit is $270, as is the monthly limitation for qualified parking, up from $265 for tax year 2019.
  • For the taxable years beginning in 2020, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.
  • For the tax year 2020, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, the same as for the tax year 2019; but not more than $3,550, an increase of $50 from the tax year 2019. For self-only coverage, the maximum out-of-pocket expense amount is $4,750, up $100 from 2019. For the tax year 2020, participants with family coverage, the floor for the annual deductible is $4,750, up from $4,650 in 2019; however, the deductible cannot be more than $7,100, up $100 from the limit for the tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020, an increase of $100 from the tax year 2019.
  • For the tax year 2020, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $118,000, up from $116,000 for the tax year 2019.
  • For tax year 2020, the foreign earned income exclusion is $107,600 up from $105,900 for tax year 2019.
  • Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000, up from a total of $11,400,000 for estates of decedents who died in 2019.
  • The annual exclusion for gifts is $15,000 for calendar year 2020, as it was for calendar year 2019. The maximum credit allowed for adoptions for tax year 2020 is the amount of qualified adoption expenses up to $14,300, up from $14,080 for 2019.
  • The 3.8% Net Investment Income surtax implemented by President Obama in 2010 for incomes above $200,000 single and $250,000 joint still utilizes the same non-inflation-adjusted thresholds.
  • The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.
  • The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500.
  • The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.
  • The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
  • In 2020, the QBI threshold will increase to $326,600 for married couples filing joint returns and to $163,300 for married individuals filing separate returns, single taxpayers and heads of households who operate pass-through businesses.

 
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Manning & Associates and / or MANNINGTAX.COM.  This information is published for informational purposes only.

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Mistakes clients make to reduce income is their failure to maximize deferrals and contributions to retirement plans



253-752-3920

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tamsyn@manningtax.com

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Mistakes clients make to reduce income is their failure to maximize deferrals and contributions to retirement plans

Credit: TaxSpeaker.  Taxspeaker® provides education to tax, legal and financial professionals in all 50 states, as well as several foreign countries. As the only continuing education company whose manuals ever won the coveted CPA Practice Advisor Reader’s Choice Award (4 years in a row!), Taxspeaker® is known for its industry-leading manuals, expert and energetic speakers, and award-winning research and compliance checklists and guides.

To learn more, visit TaxSpeaker.com.

The single most common mistake we see from clients wishing to reduce their income tax burden is their failure to maximize deferrals and contributions to retirement plans. Whether the plan is a 401-K, 457, 403-B, SARSEP or Simple-IRA, the client desiring tax savings MUST maximize deferrals to these plans. Most employers have matching programs for some portion of the 401-K deferral and failure to maximize the deferral misses this benefit of free money from the employer.

Maximum deferrals for 2019 are:
$13,000-SIMPLE IRA & SARSEP (plus $3,000 over age 49 catch-up)
$19,000-401-K, 403-B, 457 (plus $6,000 over age 49 catch up)

One of the single best tools for tax planning is to take the deferral type plans and double-dip when working for two unrelated employers. The maximum deferral is the most that may be deferred by 1 taxpayer in the year 2019 for all deferral plans (Simple & 401-K & 403-B) even if with different employers ($19,000). However, this taxpayer’s maximum deferral rule does not apply to participants in 457 plans under IRC Section 402(g)(3).

The limits on deferrals are applied per taxpayer, but the limit on employer contribution amounts are applied per employer. The only employer limit is the maximum contribution rule limiting the employer to the lesser of 25% of compensation or the current year limit.

Example 1:

Walt Whitman works for Yosemite, Inc. for the first six months of the year and defers his maximum amount of $19,000. Yosemite deposits the maximum amount for Jack of $37,000 to hit the maximum contribution for the year for Jack of $56,000 for 2019. The employer deposit rule is applied as:

The maximum contribution from all sources this year: $56,000

Plus over 49 catch-ups, where applicable: 0

Less employee deferral – 19,000

Equals employer maximum contribution: $37,000

On July 1, 2019, Walt leaves Yosemite and goes to work at Teton. Walt is unable to defer any more money this year because he has hit the taxpayer maximum deferral from all sources for 2019 of $19,000. However, Teton, a separate independent company from Yosemite, applies the employer limit and contributes $56,000 for Walt as follows:

The maximum contribution from all sources this year: $56,000

Plus over 49 catch-ups, where applicable: 0

Less employee deferral – 0

Equals employer maximum contribution: $56,000

Assuming Walt earns at least $224,000 at Teton this year he needs to participate in the 401-K but not defer since ($224,000 x 25% =$56,000) and if WorldCom decides to make a 401-K profit sharing contribution Walt may receive up to $56,000.

Summary. In this case, Walt would be able to deposit, between his own deferrals and the employer contributions, $112,000 this year! (19,000 + 37,000 + 56,000).

Example 2:

What if in Example 1 above, Walt left Teton before year-end and went to a third employer? In the wildest case scenario, Walt would again be unable to defer anything because he has hit the maximum taxpayer deferral limit for the year, but the employer could still deposit up to $56,000 in Wat’s 401-K.

Example 3:

What if in Example 1 above, Walt left Yosemite before year-end and went to work for the State of California and participated in their 457 plan? The maximum annual taxpayer deferral rule does not apply to 457 plans as noted, and Walt could defer another $19,000 with the State of California 457 plan, for a total 2019 deferral of $38,000!

Example 4:

What if in Example 1 above, Walt never left Yosemite, but instead started his own consulting business for deferred tax calculations. Could Walt set up a 401-K personally?

Because Walt’s consulting business is unrelated to Yosemite, he could set up a new 401-K, defer nothing, but he could deposit the employer maximum of $56,000 if he made at least $224,000 in the consulting business. (Remember the employer deposit is limited to 25% of compensation). This provides Walt a much better benefit than establishing nearly any other type of retirement plan for his part-time business.

Example 5:

What if in Example 1 above, Walt started his own consulting business but established a SEP-IRA: could he deposit $56,000 in it? Yes, again because it is an independent company. We prefer the solo 401-K because of the availability of an over age 49 catch-up that is not available to the SEP.

Could Walt establish a SIMPLE-IRA? Again yes, but he could not defer anything because he has already hit the annual taxpayer deferral limit at Yosemite. He could put in 2% of compensation into the SIMPLE, but the 401-K allows 25% and both are voluntary, so the 401-K is again the better choice.

Source: TaxSpeaker, 4403 Hamburg Pike, Suite B – Jeffersonville, Indiana 47130

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Manning & Associates and/or MANNINGTAX.COM.  This information is published for informational purposes only.


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  • Address: Manning & Associates, LLC
    2602 N Proctor St #201 Tacoma, WA 98407


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  • Mon-Fri: 9AM – 4PM

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