Year-End Tax Planning? Don't Forget to Factor 2020 Cost-of-Living Adjustments

Recently, the IRS issued its 2020 cost-of-living tax adjustments. Many amounts increased minimally, thanks to stable inflation, while others remained at 2019 levels. As a result, it is important to consider these 2020 adjustments as you plan and implement 2019 year-end tax strategies.

Under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as the C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than the consumer price index rate, and may push taxpayers into higher tax bracket, making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis.

Individual Income Taxes

Although tax-bracket thresholds increase for each filing status, they often increase more for higher brackets because they're based on percentages. The top of the 10% bracket, for example, increases by $175 to $350, but the top of the 35% bracket increases by $8,100 to $9,700, and it all depends upon filing status.

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Personal exemptions were suspended through 2025 by the TCJA. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. The standard deduction for 2020 is $24,800 (for married couples filing jointly), $18,650 (for heads of households), and $12,400 (for singles and married couples filing separately). Standard deduction amounts are scheduled to drop back to pre-TCJA amounts after 2025.

For some taxpayers, changes to the standard deduction could help make up for personal exemption loss. However, it may not help taxpayers who typically itemize deductions.

Alternative Minimum Tax

A separate tax system, called the alternative minimum tax (AMT), limits some deductions and doesn't permit others and treats certain income items differently. You must pay the AMT if your AMT liability is greater than your regular tax liability.

The AMT brackets are annually indexed for inflation like regular tax brackets. The threshold for the 28% bracket increased by $3,100 for all filing statuses except married filing separately, which increased by half the amount for 2020.

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AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2020 are $72,900 for singles and heads of households, and $113,400 for joint filers, increasing by $1,200 and $1,700, respectively, over 2019 amounts. For 2020, the inflation-adjusted phaseout ranges are $518,400 to $810,000 (singles and heads of households) and $1,036,800 to $1,490,400 (for joint filers). The amounts for separate filers are half those for joint filers.

Education and Child-Related Breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2020. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break, and breaks are eliminated for those whose MAGIs exceed the range’s top.

The MAGI phaseout ranges remain the same or increase modestly for 2020, depending on the break. For example:

The American Opportunity credit: The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2020: $160,000 to $180,000 for joint filers and $80,000 to $90,000 for other filers.

The Lifetime Learning credit: The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2020. They’re $118,000 to $138,000 for joint filers and $59,000 to $69,000 for other filers — up $2,000 for joint filers and $1,000 for others.

The adoption credit: The MAGI phaseout ranges for eligible taxpayers adopting a child will also increase for 2020 — by $3,360, from $214,520 to $254,520 for joint, head-of-household and single filers. The maximum credit increases by $220, to $14,300 for 2020.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. If your MAGI is too high for you to qualify for child education break, your child might be eligible to claim one on his or her tax return, so keep this in mind.

Gift and Estate Taxes

Both the unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are adjusted annually for inflation. The amount for 2020 is $11.58 million (up from $11.40 million for 2019).

Remaining at $15,000 for 2020 is the annual gift tax exclusion. It is adjusted only in $1,000 increments, so it typically increases only every few years (it rose to $15,000 in 2018).

Retirement Plans

Not all of the retirement-plan-related limits increase for 2020. Thus, if you've already been contributing the maximum amount allowed, you may have limited opportunities to increase your retirement savings.

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Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2020:

Traditional IRAs: If a taxpayer (or spouse) participates in an employer-sponsored retirement plan, MAGI phaseout ranges apply to the deductibility of contributions:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • For a spouse who participates, the 2020 phaseout range limits increase by $1,000, to $104,000 through $124,000
    • For a spouse who doesn’t participate, the 2020 phaseout range limits increase by $3,000, to $196,000 through $206,000
    • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2020 phaseout range limits increase by $1,000, to $65,000 through $75,000

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

However, a nondeductible traditional IRA contribution can be made by a taxpayer whose deduction is reduced or eliminated. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. If your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA, nondeductible traditional IRA contributions may be beneficial.

Roth IRAs: Your ability to contribute to a Roth IRA is not affected by whether you participate in an employer-sponsored plan, but MAGI limits may reduce or eliminate your ability to contribute.

  • For married taxpayers filing jointly, the 2019 phaseout range limits increase by $3,000, to $196,000 through $206,000.
  • For single and head-of-household taxpayers, the 2019 phaseout range limits increase by $2,000, to $124,000 through $139,000.

A partial contribution can be made if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Doing the Math

It's important to understand how your tax and financial situation may be affected with 2020 cost-of-living adjustment amounts inching slightly higher than 2019 amounts. Weaver can help crunch the numbers and explain the best tax-saving strategies to implement based on the 2020 numbers; contact us today.

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