This 2020 tax brackets guide outlines all the key changes that taxpayers should prepare for. While the seven income tax brackets didn’t change, the earnings thresholds are certainly different from 2019. Similarly, the capital gains tax brackets, Alternative Minimum Tax income limits, and Social Security contribution amounts also increased. In short, you may end up owing more or less in taxes, even if your income didn’t change. This 2020 tax brackets guide will show you how the new income thresholds may impact your household and budget.
Income Thresholds and Taxes Owed
Every tax bracket covers an income range. Households or individuals whose earnings fall within the bracket’s ranges must pay a certain percentage of their income in taxes. If consumers make more than the upper limit, they move to a higher bracket (which also increases the percentage of their taxable income). Those who move to a lower bracket, on the other hand, owe less in taxes. Every year, the IRS adjusts the upper and lower range of each bracket. This is because the cost of living goes up. However, the percentages don’t change on an annual basis.
Brackets classify taxpayers as either single, married filling jointly, married filing separately, or head-of-household. Single individuals and married couples have the same income thresholds and tax percentages.
2020 Income Taxes (vs 2019)
Here are the new tax brackets for individuals and married couples that file separately:
- 10% (of their income is taxable): $0 to $9,875 (vs $0 to $9,700 in 2019)
- 12%: $9,876 to $40,125 (vs $9,701 to $39,475)
- 22%: $40,126 to $85,525 (vs $39,476 to $84,200)
- 24%: $85,526 to $163,300 (vs $84,201 to $160,725)
- 32%: $163,301 to 207,350 (vs $160,726 to $204,100)
- 35%: $207,351 to $311,025 if married filing separately or to $518,400 if single (vs $204,101 to $306,175 or to $510,300, respectively)
- 37%: $311,026 and above if married filing separately or $518,401 and above if single (vs $306,176 and above or $510,300 and above, respectively)
The income thresholds of married couples that file jointly are exactly double those of separate filers and individuals (apart from the top tax bracket). For instance, married couples who make $19,750 or less (double the $9,875 minimum range for single and separate married filers) would only owe 10% in taxes. Meanwhile, married households that earn over $622,050 would fall under the highest tax bracket and pay 37% in income taxes. This is equal to the $311,025 maximum threshold of separate married filers times two. Heads of households have their own, distinct tax brackets. However, they still pay the same income percentages (between 10% and 37%) based on how much they make.
Your 2020 Tax Brackets Guide and Inflation
The IRS increases the threshold for each tax bracket on an annual basis. They do so in order to account for inflation and the rising cost of living. However, the change in income tax thresholds will mostly impact filers that are on the verge of moving to another bracket. For example, let’s consider a single person who makes $40,000 per year. In 2019, they would’ve owed 22% of their income in taxes since their earnings fall within the $39,476 to $84,200 bracket. During 2020, meanwhile, their taxable income would become 12% (almost half of their 2019 tax rate of 22%). This is because the bracket’s earnings range changed to $40,126 to $85,525 for 2020. As a result, the said single taxpayer fell to a lower bracket that only requires them to pay 12% of their income.
The Capital Gains Tax
Long-term investments have their own tax rates and thresholds that are different from the regular income brackets. Capital gains taxes only fall under three brackets (as opposed to income taxes, which have seven brackets). These brackets are 0%, 15%, and 20%. Filers that earn less than a certain amount from long-term investments don’t have to pay in capital gains taxes. Previously, during 2019, single and separate married filers who earned less than $39,375 paid a zero percent tax rate. In 2020, the threshold was raised to $40,000 or less in investment revenues.
Joint married filers and heads of households who make less than $80,000 and $53,600 in capital gains, respectively, will pay 0% in capital gains taxes for 2020. In the previous year, these thresholds were $78,750 (married filing jointly) and $52,750 (head of household). To clarify, a married couple that makes $80,000 from long-term investments had to pay a 15% tax rate in 2019. This year, however, their tax rate is 0% at that income level. The maximum capital gains tax rate is 20%.
The capital gains tax mostly applies for long-term investments, such as stocks, that are held for over one year. If a person buys and sells a stock within less than 12 months, the proceeds count towards their regular income. The IRS taxes it accordingly. Yet if an investor held on to a stock for more than a year, their profits will count as part of their capital gains when they sell the shares (and not as a regular income).
Social Security Contribution Limits
Regardless of their income and marital/filing status, every individual must pay 12.4% in Social Security payroll taxes. W-2 employees would pay 6.2%, and their employers contribute the other half. Self-employed taxpayers must cover the full 12.4% tax rate. The Social Security payroll tax is fixed. That is to say, the percentage doesn’t change based on how much you earn. However, there is a cap on that taxable income.
During 2019, any person who made over $132,900 only needed to pay Social Security taxes on that specific amount. For example, a taxpayer who earned $150,000 only owes 12.4% of the $132,900 (and not their actual $150,000 in earnings). As for 2020, the new threshold is $137,700. This means that taxpayers who make between $132,900 and $137,700 will now owe more in Social Security taxes. Those who earn above $137,700 must pay 12.4% of that amount.
Alternative Minimum Tax (AMT)
The AMT threshold also increased in 2020. To clarify, high-income earners that utilize a lot of deductions need to pay the AMT instead of the regular income tax. Moreover, the AMT covers income streams that the general income tax doesn’t, such as earnings from stock options, private equity bonds, and foreign tax credits. In 2020, the AMT applies to single individuals that made over $71,700 and joint married filers whose earnings exceed $113,400. These thresholds increased in comparison to 2019.
Your 2020 Tax Brackets Guide: A Summary
In a few words, here are the key changes that taxpayers should be aware of:
- Income and Capital Gains Taxes: The earnings range for each bracket changed.
- Social Security: If you earn more than the maximum contribution amount, your 2020 Social Security payroll tax will likely increase.
- AMT: More people don’t have to pay the AMT because the minimum income threshold went up.
This 2020 tax brackets guide will help you figure out how your finances will change this year. While you don’t need to pay the IRS until 2021, understanding the new income thresholds will make your budgeting more accurate and efficient. You could either prepare to pay more (if your taxes will go up) or make a plan on how you want to spend your extra, non-taxable earnings (if you moved to a lower bracket or no longer owe the AMT).