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IRS increases tax deductions for 2020

The Internal Revenue Service issued its annual inflation adjustments for dozens of tax items and tax schedules Wednesday, saying the standard deduction for married taxpayers who file joint tax returns will increase $400 to $24,800 in tax year 2020, while for single taxpayers and married individuals who file separately, the standard deduction will go up $200 to $12,400. For heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.

Revenue Procedure 2019-44 spells out the details about these annual adjustments. Some tax law changes in the revenue procedure were added by the Taxpayer First Act of 2019, which increased the failure to file penalty to $330 for returns due after the end of 2019. The new penalty will be adjusted for inflation beginning with tax year 2021. Tax year 2020 adjustments typically are used on tax returns filed in 2021.

An IRS office building in East Harlem
An IRS office building in the East Harlem neighborhood of New York

The tax items for tax year 2020 that promise to hold the most interest to the majority taxpayers and tax professionals include the following dollar amounts:

  • The personal exemption for 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 will stay at 37 percent for individual single taxpayers whose incomes exceed $518,400 ($622,050 for married couples filing jointly).

The other rates are:

  • 35 percent for incomes over $207,350 ($414,700 for married couples filing jointly);
  • 32 percent for incomes over $163,300 ($326,600 for married couples filing jointly);
  • 24 percent for incomes over $85,525 ($171,050 for married couples filing jointly);
  • 22 percent for incomes over $40,125 ($80,250 for married couples filing jointly);
  • 12 percent for incomes over $9,875 ($19,750 for married couples filing jointly).

The lowest rate is 10 percent for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

  • For 2020, like this year and last year, there’s no limitation on itemized deductions because that limitation was eliminated by the Tax Cuts and Jobs Act.
  • The Alternative Minimum Tax exemption amount for tax year 2020 is $72,900 and starts 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 will be $6,660 for qualifying taxpayers who have three or more qualifying children. That’s an increase from a total of $6,557 for tax year 2019. The revenue procedure contains a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For 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 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 tax year 2019; but not more than $3,550, an increase of $50 from tax year 2019. For self-only coverage, the maximum out-of-pocket expense amount is $4,750, up $100 from 2019. For 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 tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020, an increase of $100 from tax year 2019.
  • For 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 tax year 2019.
  • For tax year 2020, the foreign earned income exclusion is $107,600, an increase 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.
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