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Let’s take a look at what’s ahead in 2020. More specifically, let’s examine the 2020 cost of living adjustments and estate & gift tax limits announced recently by the IRS. Accounting for inflation, some amounts increased slightly, while others stayed at 2019 levels. These newly adjusted figures must be considered when you put together your 2019 year-end tax plan.
It is important to note that under the Tax Cuts and Jobs Act, annual inflation adjustments are now calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The law adopts the C-CPI-U on a permanent basis.
Individual income taxes
Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets.
Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help a lot of taxpayers who typically itemize deductions.
Alternative Minimum Tax
The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.
Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2020, the threshold for the 28% bracket increased by $3,100 for all filing statuses except married filing separately, which increased by half that amount.
The MAGI phaseout ranges generally 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–$180,000 for joint filers and $80,000–$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–$138,000 for joint filers and $59,000–$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 to $214,520–$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. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.
Gift and estate taxes
The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2020, the amount is $11.58 million (up from $11.40 million for 2019).
The annual gift tax exclusion remains at $15,000 for 2020. It’s adjusted only in $1,000 increments, so it typically increases only every few years. (It increased to $15,000 in 2018.)
As for the annual exclusion for noncitizen spouses, it will be higher than its 2019 levels. The exclusion will be $157,000 in 2020, which is a $2,000 increase.
Not all of the retirement-plan-related limits increase for 2020. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:
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.
But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.
Roth IRAs - Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:
You can make a partial contribution 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.)
With the 2020 cost-of-living adjustment amounts inching slightly higher than 2019 amounts, it’s important to understand how they might affect your tax and financial situation. If you have any questions about these topics, please reach out to your DGC client service team or Richelle Maguire, CPA, MST AEP at 781-937-5140 / email@example.com and Scott Treacy, CPA at 781-937-5393 / firstname.lastname@example.org.