The IRS Releases Inflation Adjustments for Tax Year 2020

Some Tax Provisions Increase Annually

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The concept of inflation can be a little difficult for the average taxpayer to understand, but we’re all familiar with its results. Groceries, housing, and the most fundamental expenditures of life cost more from year to year, so paychecks don’t stretch quite as far. Fortunately, the IRS understands this.

The IRS tweaks tax rates, credits, and other provisions yearly to keep pace with the current value of the U.S. dollar, announcing the changes each fall. It made adjustments in more than 60 categories in 2019, which are in effect during tax year 2020—the return you’ll file in 2021. Some will affect the average American more than others. Here’s what to know about the IRS 2020 inflation adjustments.

It’s important to note that the following information pertains to tax year 2020, not 2019. This information will be used when filing your taxes in 2021.

The 2020 Tax Brackets

Tax brackets increase each year—not the percentage tax rates, which can only be changed by Congress, but the taxable income ranges that each rate spans. Here’s how they’ve increased in 2020.

If you’re filing as single:

  • 10%: $0 to $9,875
  • 12%: $9,876 to $40,125
  • 22%: $40,126 to $85,525
  • 24%: $85,526 to $163,300
  • 32%: $163,301 to $207,350
  • 35%: $207,351 to $518,400
  • 37%: Over $518,400

If you’re filing as head of household: 

  • 10%: $0 to $14,100
  • 12%: $14,101 to $53,700
  • 22%: $53,701 to $85,500
  • 24%: $85,501 to $163,300
  • 32%: $163,301 to $207,350
  • 35%: $207,351 to $518,400
  • 37%: Over $518,400

And if you’re married and filing a joint return:

  • 10%: $0 to $19,750
  • 12%: $19,751 to $80,250
  • 22%: $80,251 to $171,050
  • 24%: $171,051 to $326,600
  • 32%: $326,601 to $414,700
  • 35%: $414,701 to $622,050
  • 37%: Over $622,050

Keep in mind that these are marginal rates. You won’t pay 24% on all your taxable income if you’re single and earn $90,000. Only the portion you earn in that tax bracket ($85,526-$163,300) is taxed at the 24% rate (so $4,474). The rest of your income is taxed at the applicable rate for those brackets of your income, as well.

2020 Standard Deductions

You don’t pay income tax on every dollar you earn because the IRS recognizes that it costs money to live. It therefore acknowledges that you shouldn’t have to share all of your income.

This is where tax deductions come in—they’re amounts you can shave off your gross or overall income so you only pay tax on what’s left. Taxpayers have two choices here: They can itemize their deductions or they can claim the standard deduction for their filing status. The standard deduction amounts are adjusted annually for inflation, too.

The standard deductions for 2020 are:

  • $12,400 for single taxpayers (up from $12,200 in 2019)
  • $12,400 for married taxpayers filing separately (up from $12,200 in 2019)
  • $18,650 for heads of household (up from $18,350 in 2019)
  • $24,800 for married taxpayers filing jointly (up from $24,400 in 2019)

Capital Gains Tax Rates

Capital gains tax rates apply when you sell an asset for more than your basis in it. Your basis is what you paid for it plus certain allowable costs of maintaining it. You have a short-term gain if you held the asset for one year or less. It may be considered a long-term gain if you owned it for more than one year.

This is a significant distinction because short-term capital gains are taxed at ordinary income tax rates, topping out at 37% in 2020. Long-term rates are significantly less. The highest long-term rate is 20% as of 2020.

This own-it-for-one-year rule hasn’t changed since 2017 before the Tax Cuts and Jobs Act (TCJA) went into effect. But the three long-term rates of 0%, 15%, and 20% used to be tied to the ordinary income tax brackets. You would pay 15% in long-term capital gains tax if you fell into the then 25%, 28%, 33% or 35% tax brackets on your ordinary income. Then the TCJA gave long-term capital gains their own tax rates beginning in 2018, and the incomes they cover were indexed for inflation.

As of 2020, single filers will pay 0% on taxable income up to $40,000, head of household filers will pay 0% on income up to $53,600, and married couples filing jointly will pay 0% on taxable income up to $80,000. Single filers will then pay 15% on income between $40,001 and $441,450, and 20% on income over $441,450. Head of household filers will pay 15% on income between $53,601 and $469,050, and then 20% on income over $469,050. Married couples filing jointly will pay 15% on income between $80,001 and $496,600, and 20% on income over $496,600.

Health Savings and Flexible Spending Accounts

HSAs and FSAs allow taxpayers to tuck money away to pay for medical costs without paying any tax on that income.

FSAs must be used to pay for out-of-pocket health care costs—the portion not covered by your insurer. You pay the cost, then submit a claim to the FSA for reimbursement from your savings in the account. Generally, the savings disappear if you don’t spend the money on approved costs, effectively expiring after a period of time.

It’s a use-it-or-lose-it type of arrangement, with the exception of a small amount that you may be able to carry over from year to year.

HSAs work similarly. You get a tax deduction for contributions you make to an HSA, and if your employer makes any contributions, this is tax-free income. Unlike FSAs, your savings won’t expire, but there’s another catch. You can only qualify if you have a high-deductible health plan (HDHP).

The IRS keeps a lid on how much you can save in these plans and on qualifying criteria, and the caps are adjusted annually for inflation. You can save up to $2,750 in an FSA in 2020, up from $2,700 in 2019. The contribution limit is $3,550 for self-only coverage in an HSA and $7,100 for family coverage for HSAs, an increase of $50 and $100 from 2019 limits, respectively. 

The Alternative Minimum Tax

The alternative minimum tax (AMT) has been around since 1969 when Congress realized that some taxpayers with incomes over $200,000 were avoiding paying any income tax whatsoever through the advantageous use of various tax breaks. Congress, therefore, implemented the AMT, obligating taxpayers with incomes over a certain threshold to add certain claimed deductions back to their taxable incomes.

These thresholds are among the tax provisions that the IRS indexes for inflation. The exemption amounts for 2020 are $72,900 for single taxpayers (phasing out at $518,400, up from $510,300 in 2019) and $113,400 for those who are married and file joint tax returns (phasing out at $1,036,800, up from $1,020,600 in 2019). You don’t have to worry yourself over the AMT if you earn less than these figures, which increased from $71,700 and $111,700 in 2019.

Employee Fringe Benefits

Technically, fringe benefits provided by your employer are taxable income—except when they’re not. The IRS is willing to exclude employer-provided transportation benefits from your taxable income, and these amounts increase with inflation as well.

You can receive up to $270 a month from your employer in 2020 for qualified transportation benefits and qualified parking benefits—that’s $270 each if you happen to qualify for and receive both. This one isn’t a big increase, up just $50 from 2019, but even a penny saved is a penny earned.

Tax Credits

Then there are tax credits. Unlike deductions, these don’t reduce your taxable income. They subtract from your tax bill to help you owe less money to the IRS. Several credits are indexed for inflation.

  • The maximum Earned Income Tax Credit (EITC) increases to $6,660 in 2020, although this isn’t really much of an increase. It was $6,557 in 2019. Qualifying for the maximum credit depends on the number of child dependents you have and your earned income. As the name suggests, you must have earned income in order to qualify.
  • You can now qualify for the full Lifetime Learning Credit on an adjusted gross income of $118,000 if you’re married and filing a joint return. This is up $2,000 from what it was in 2019. This is a credit for qualifying tuition and educational expenses you paid during the tax year for yourself, your spouse, or your dependents, subject to certain rules.
  • The maximum Adoption Tax Credit has gone up a little as well, from $14,080 in 2019 to $14,300 in 2020. This credit covers qualified adoption expenses you paid during the year.

Other Increases

The foreign earned income exclusion also increases in 2020 to $107,600, up from $105,900 in 2019. Additionally, the basic exclusion amount for estates of decedents who die in 2020 is $11,580,000, up from $11,400,000 in 2019.

Some Things Don’t Change

The TCJA eliminated personal exemptions from the tax code beginning in 2018, and that provision is still in place in 2020. The personal exemption won’t come back until at least 2025 when the TCJA expires.

The Child Tax Credit remains unchanged in 2020 as well. It’s not adjusted for inflation. It stays at $2,000 per qualifying child and $1,400 of it is refundable.

Article Sources

  1. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Jan. 10, 2020.

  2. Internal Revenue Service. "Tax forms and instructions." Page 10. Accessed Jan. 10, 2020.

  3. Internal Revenue Service. "Capital Gains and Losses." Accessed Jan. 10, 2020

  4. The Joint Committee on Taxation. Downloadable Sheet. "Estimating Taxpayer Bunching Responses to the Preferential Capital Gains Tax Rate Threshold." Page 2, Footnote. Accessed Jan. 10, 2020.

  5. Bradford Tax Institute. "2017 Capital Gains Rates." Accessed Jan. 10, 2020.

  6. Internal Revenue Service. "Publication 969 (2018), Health Savings Accounts and Other Tax-Favored Health Plans." Accessed Jan. 10, 2020.

  7. U.S. Government Accountability Office. "ALTERNATIVE MINIMUM TAX:

    An Overview of Its Rationale and Impact on Individual Taxpayers." Accessed Jan. 10, 2020.

  8. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2020.” Accessed Jan. 10, 2020.

  9. Internal Revenue Service. "Employer's Tax Guide to Fringe Benefits For use in 2020." Page 20. Accessed Jan. 10, 2020.

  10. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2020.” Accessed Jan. 10, 2020.

  11. Tax Foundation. "2020 Tax Brackets." Accessed Jan. 10, 2020.