2020 Tax Rate Increase Reported Today

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Here’s a Look At 2020 Tax Rates

  • 2020 Tax Projected Brackets
  • 2020 Tax Standard Deduction Amounts And More

The U.S. Bureau of Labor Statistics reported today that the consumer price index (CPI) has increased by 0.1% for August, after rising 0.3% in July. Here’s what that means for taxpayers in 2020, together with the first look at predicted rates for the next year as calculated by Bloomberg Tax & Accounting.

The CPI measures the cost of goods and services—in other words, your cost of living. Under the Tax Cuts And Jobs Act * (TCJA), the Internal Revenue Service (IRS) now figures cost-of-living adjustments using a “chained” CPI. The chained CPI measures consumer responses to higher prices rather than merely measuring the higher prices. What that means for taxpayers is that inflation adjustments will appear smaller: Most inflation-adjusted amounts, including the threshold dollar amounts for tax rate brackets, are projected to rise by less than 1.5% in 2020.

*(The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,[2] Pub.L. 115–97, is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs Act (TCJA),[3][4] that amended the Internal Revenue Code of 1986. Major elements of the changes include reducing tax rates for businesses and individuals, increasing the standard deduction and family tax credits, eliminating personal exemptions and making it less beneficial to itemize deductions, limiting deductions for state and local income taxes and property taxes, further limiting the mortgage interest deduction, reducing the alternative minimum tax for individuals and eliminating it for corporations, reducing the number of estates impacted by the estate tax, and cancelling the penalty enforcing individual mandate of the Affordable Care Act (ACA))

Projecting Smaller Tax Rate Increases in 2020

“We are projecting smaller increases for most inflation-adjusted amounts this year, as we expected, due in part to the use of the chained CPI to measure cost of living adjustments, and partly due to the slower rise in inflation overall,” said Annabelle Gibson, practice lead for U.S. income tax and IRS procedure, Bloomberg Tax & Accounting. “Our projections help taxpayers and tax planners get a jumpstart on the 2020 tax planning season in advance of the Internal Revenue Service’s publication of official 2020 inflation-adjusted amounts later this fall.”

Following are projected numbers for the tax year 2020, beginning January 1, 2020. These are not the tax rates and other numbers for 2019

 

Taxes Changes in 2020

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It’s time to get right back to tax preparation for the next 2020 tax season.

Find Out The 10 Things You Need To Know Before Filing your Taxes

We’re already nearly done with the tax year 2019 — the one for which your return is due by April 2020. If you want to make the most of everything from tax deductions to tax-advantaged accounts this year, now is the time to learn the rules that will apply to your next return.

Many key dollar figures — from standard deductions to retirement account contribution limits — can change every year due to inflation. Additionally, some aspects of 2018’s tax reform didn’t take effect until this year.

So, here is a look at some of the biggest ways in which the federal tax return you file in 2020 will differ from the one that you hopefully filed by today:

1. Higher medical expense deduction threshold

Image result for medical bills

Another way in which 2010’s Affordable Care Act had an impact on taxes was by raising the threshold for deductible medical and dental expenses from 7.5% to 10% of adjusted gross income, which made it harder to qualify for the deduction.

This meant that if you itemized your tax deductions, you could deduct eligible out-of-pocket medical expenses if they exceeded 10% of your income, rather than the previous 7.5%.

The Tax Cuts and Jobs Act gave taxpayers a brief reprieve from that change, lowering the threshold back down to 7.5%, but only for the 2017 and 2018 tax years. Starting this year, it returns to 10%.

In other words, as the IRS puts it in Publication 5307, which details how tax reform affects individuals:

“If you plan to itemize for tax year 2019, your unreimbursed medical and dental expenses will have to exceed 10% of your 2019 adjusted gross income in order to be deductible.”

2. No individual mandate penalty

Most of the tax code changes stemming from the Tax Cuts and Jobs Act of 2017 took effect in 2018. One exception is the change to the shared responsibility payment, which takes effect this year.

The shared responsibility payment — commonly referred to as the individual mandate penalty — has applied to folks required to have health insurance under the Affordable Care Act but who didn’t get coverage and didn’t qualify for an exemption. If you owed the penalty, it was due when you pay your taxes.

Starting this year, however, there is no penalty. The Tax Cuts and Jobs Act zeroed it out effective in 2019. So, folks who don’t have health insurance this year will not owe the penalty when they file their taxes in 2020.

3. No alimony deduction

Image result for divorce couple

Elimination of the alimony deduction is another Tax Cuts and Jobs Act change that took effect in 2019 rather than 2018. For divorce and separation agreements made or modified this year or thereafter, alimony payments will not be deductible, says IRS Publication 5307.

So, a spouse who gets divorced this year and pays alimony this year cannot write the payments off on a tax return in 2020. That also means that a spouse who gets divorced this year and receives alimony this year will not count the payments as income on the tax return filed next year.

 

 

 

4. Higher HSA contribution limits

Health savings accounts are another type of tax-advantaged account for which the contribution limits generally increase as the years roll along. HSAs are not strictly for retirement savings, although you can effectively use them as retirement accounts, as we explain in “3 Reasons You Need a Health Savings Account — and How to Open One Today.”

The 2019 contribution limits for people who are eligible for an HSA and have the following types of high-deductible health insurance policies are:

  • Self-only coverage: $3,500 (up from $3,450 last year)
  • Family coverage: $7,000 (up from $6,900)

5. Higher standard deductions

Image result for deductions

Standard deductions are somewhat higher this year on account of inflation. The IRS reports that they are:

  • Married filing jointly: $24,400 (up $400 from last year)
  • Married filing separately: $12,200 (up $200)
  • Head of household: $18,350 (up $350)
  • Single: $12,200 (up $200)

The standard deduction reduces the amount of your income that’s subject to federal taxes. So, if a married couple filing a joint tax return is eligible for and chooses to take the standard deduction on their next return, they would not be taxed on the first $24,400 of their taxable income from 2019.

HOW LONG DO YOU NEED TO KEEP YOUR BUSINESS TAX RECORDS?

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Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the “three-year law” and leads many people to believe they’re safe provided they retain their documents for this period of time.

However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.

Create a Backup Set of Records and Store Them Electronically. Keeping a backup set of records — including, for example, bank statements, tax returns, insurance policies, etc. — is easier than ever now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet.

Even if the original records are provided only on paper, they can be scanned and converted to a digital format. Once the documents are in electronic form, taxpayers can download them to a backup storage device, such as an external hard drive, or burn them onto a CD or DVD (don’t forget to label it).

You might also consider online backup, which is the only way to ensure that data is fully protected. With online backup, files are stored in another region of the country, so that if a hurricane or other natural disaster occurs, documents remain safe.

 

Caution: Identity theft is a serious threat in today’s world, and it is important to take every precaution to avoid it. After it is no longer necessary to retain your tax records, financial statements, or any other documents with your personal information, you should dispose of these records by shredding them and not disposing of them by merely throwing them away in the trash.

 

Business Documents To Keep For One Year

  • Correspondence with Customers and Vendors
  • Duplicate Deposit Slips
  • Purchase Orders (other than Purchasing Department copy)
  • Receiving Sheets
  • Requisitions
  • Stenographer’s Notebooks
  • Stockroom Withdrawal Forms

Business Documents To Keep For Three Years

  • Employee Personnel Records (after termination)
  • Employment Applications
  • Expired Insurance Policies
  • General Correspondence
  • Internal Audit Reports
  • Internal Reports
  • Petty Cash Vouchers
  • Physical Inventory Tags
  • Savings Bond Registration Records of Employees
  • Time Cards For Hourly Employees

Business Documents To Keep For Six Years

  • Accident Reports, Claims
  • Accounts Payable Ledgers and Schedules
  • Accounts Receivable Ledgers and Schedules
  • Bank Statements and Reconciliations
  • Cancelled Checks
  • Cancelled Stock and Bond Certificates
  • Employment Tax Records
  • Expense Analysis and Expense Distribution Schedules
  • Expired Contracts, Leases
  • Expired Option Records
  • Inventories of Products, Materials, Supplies
  • Invoices to Customers
  • Notes Receivable Ledgers, Schedules
  • Payroll Records and Summaries, including payment to pensioners
  • Plant Cost Ledgers
  • Purchasing Department Copies of Purchase Orders
  • Sales Records
  • Subsidiary Ledgers
  • Time Books
  • Travel and Entertainment Records
  • Vouchers for Payments to Vendors, Employees, etc.
  • Voucher Register, Schedules

Business Records To Keep Forever

While federal guidelines do not require you to keep tax records “forever,” in many cases there will be other reasons you’ll want to retain these documents indefinitely.

  • Audit Reports from CPAs/Accountants
  • Canceled Checks for Important Payments (especially tax payments)
  • Cash Books, Charts of Accounts
  • Contracts, Leases Currently in Effect
  • Corporate Documents (incorporation, charter, by-laws, etc.)
  • Documents substantiating fixed asset additions
  • Deeds
  • Depreciation Schedules
  • Financial Statements (Year End)
  • General and Private Ledgers, Year End Trial Balances
  • Insurance Records, Current Accident Reports, Claims, Policies
  • Investment Trade Confirmations
  • IRS Revenue Agents’ Reports
  • Journals
  • Legal Records, Correspondence and Other Important Matters
  • Minute Books of Directors and Stockholders
  • Mortgages, Bills of Sale
  • Property Appraisals by Outside Appraisers
  • Property Records
  • Retirement and Pension Records
  • Tax Returns and Worksheets
  • Trademark and Patent Registrations