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November 14, 2019

2020 Tax Brackets

Amir El-Sibaie

Amir El-Sibaie

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On a yearly basis the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent what is called “bracket creep,” when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any increase in real income.

The IRS used to use the Consumer Price Index (CPI) to calculate the past year’s inflation.[1] However, with the Tax Cuts and Jobs Act of 2017, the IRS will now use the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.[2]

2020 Federal Income Tax Brackets and Rates

In 2020, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Table 1). The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $518,400 and higher for single filers and $622,050 and higher for married couples filing jointly.

2020 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households
Rate For Single Individuals For Married Individuals Filing Joint Returns For Heads of Households
10% Up to $9,875 Up to $19,750 Up to $14,100
12% $9,876 to $40,125 $19,751 to $80,250 $14,101 to $53,700
22% $40,126 to $85,525 $80,251 to $171,050 $53,701 to $85,500
24% $85,526 to $163,300 $171,051 to $326,600 $85,501 to $163,300
32% $163,301 to $207,350 $326,601 to $414,700 $163,301 to $207,350
35% $207,351 to $518,400 $414,701 to $622,050 $207,351 to $518,400
37% $518,401 or more $622,051 or more $518,401 or more

Source: Internal Revenue Service

Standard Deduction and Personal Exemption

The standard deduction for single filers will increase by $200, and by $400 for married couples filing jointly (Table 2).

The personal exemption for 2020 remains eliminated.

Table 2. 2020 Standard Deduction

Source: Internal Revenue Service
Filing Status Deduction Amount
Single $12,400
Married Filing Jointly $24,800
Head of Household $18,650

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.

The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subjected to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.

The AMT exemption amount for 2020 is $72,900 for singles and $113,400 for married couples filing jointly (Table 3).

Table 3. 2020 Alternative Minimum Tax Exemptions

Source: Internal Revenue Service
Filing Status Exemption Amount
Single Individuals $72,900
Married Filing Jointly $113,400

In 2020, the 28 percent AMT rate applies to excess AMTI of $197,900 for all taxpayers ($98,950 for married couples filing separate returns).

AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. In 2020, the exemption will start phasing out at $518,400 in AMTI for single filers and $1,036,800 for married taxpayers filing jointly (Table 4).

Table 4. 2020 Alternative Minimum Tax Exemption Phaseout Thresholds

Source: Internal Revenue Service
Filing Status Threshold
Single Individuals $518,400
Married Filing Jointly $1,036,800

Earned Income Tax Credit

The maximum Earned Income Tax Credit in 2020 for single and joint filers is $538, if there are no children (Table 5). The maximum credit is $3,584 for one child, $5,920 for two children, and $6,660 for three or more children. All these are relatively small increases from 2019.

Table 5. 2020 Earned Income Tax Credit Parameters

Source: Internal Revenue Service
Filing Status   No Children One Child Two Children Three or More Children
Single or Head of Household Income at Max Credit $7,030 $10,540 $14,800 $14,800
Maximum Credit $538 $3,584 $5,920 $6,660
Phaseout Begins $8,790 $19,330 $19,330 $19,330
Phaseout Ends (Credit Equals Zero) $15,820 $41,756 $47,440 $50,954
Married Filing Jointly Income at Max Credit $7,030 $10,540 $14,800 $14,800
Maximum Credit $538 $3,584 $5,920 $6,660
Phaseout Begins $14,680 $25,220 $25,220 $25,220
Phaseout Ends (Credit Equals Zero) $21,710 $47,646 $53,330 $56,844

Child Tax Credit

The child tax credit totals at $2,000 per qualifying child and is not adjusted for inflation. However, the refundable portion of the Child Tax Credit is adjusted for inflation but will remain at $1,400 for 2020.

Capital Gains Tax Rates (Long Term Capital Gains)

Long-term capital gains are taxed using different brackets and rates than ordinary income.

2020 Capital Gains Tax Rates (Long Term Capital Gains)

Source: “2020 Tax Brackets,” Tax Foundation and IRS Topic Number 559
  For Unmarried Individuals For Married Individuals Filing Joint Returns For Heads of Households
 

Taxable Income Over
0% $0 $0 $0
15% $40,000 $80,000 $53,600
20% $441,450 $496,600 $469,050
 

Additional Net Investment Income Tax
3.8% MAGI above $200,000 MAGI above $250,000 MAGI above $200,000

Qualified Business Income Deduction (Sec. 199A)

The Tax Cuts and Jobs Act includes a 20 percent deduction for pass-through businesses against up to $163,300 of qualified business income for single taxpayers and $326,600 for married taxpayers filing jointly (Table 7).

Table 7. 2020 Qualified Business Income Deduction Thresholds

Source: Internal Revenue Service
Filing Status Threshold
Single Individuals $163,300
Married Filing Jointly $326,600

Annual Exclusion for Gifts

In 2020, the first $15,000 of gifts to any person is excluded from tax. The exclusion is increased to $157,000 for gifts to spouses who are not citizens of the United States.

See New Tax Brackets

[1] Internal Revenue Service, “Revenue Proc. 2019-44,” https://www.irs.gov/pub/irs-drop/rp-19-44.pdf.

[2] Robert Cage, John Greenlees, and Patrick Jackman, “Introducing the Chained Consumer Price Index,” U.S. Bureau of Labor Statistics, May 2003, https://www.bls.gov/cpi/additional-resources/chained-cpi-introduction.pdf.

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Amir El-Sibaie

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.

A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

A capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.

Bracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.

The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system.