The Internal Revenue Service (IRS) has announced the official changes to federal tax rates, deductions, credits, and exclusions for 2020. Some of the more substantive changes include an increase in the estate tax exemption amount, an expansion of the income tax rate brackets, and an expansion of the capital gains tax rate brackets. The following are key updates of interest to individuals and families.
Income Tax Rate Brackets
Highest marginal rate is 37% on taxable income over the following amounts:
- Married, Filing Jointly and Surviving Spouses: $622,050
- Head of Household: $518,400
- Unmarried (other than Surviving Spouses and Head of Household): $518,400
- Married, Filing Separate: $311,025
- Estates and Trusts: $12,950
Unified Credit Against Estate Tax
For an estate of a person dying in calendar year 2020, the basic exclusion amount is $11,580,000 for determining the amount of the Unified Credit against the federal estate tax.
Valuation of Qualified Real Property in Decedent’s Gross Estate
For an estate of a person dying in calendar year 2020, if the executor elects to use the special use valuation method under IRC Section 2032A for qualified real property, the aggregate decrease in the value of the qualified real property for purposes of the federal estate tax cannot exceed $1,180,000.
Annual Exclusion for Gifts
- Annual exclusion gifts – the first $15,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.
- Gifts to a non-U.S. citizen spouse – the first $157,000 of gifts to a spouse who is not a U.S. citizen (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during the year.
Long-Term Capital Gains Rates
Long-term capital gains are taxed at 0%, 15%, or 20%, depending on taxable income and filing status.
Taxpayers qualify for the 0% rate if their taxable income is below $80,000 in the case of a joint return or surviving spouse ($40,000 in the case of married, filing separate), $53,600 in the case of head of household, $40,000 in the case of any other individual, and $2,650 in the case of an estate or trust.
The rate is 15% for those with taxable income below $496,600 in the case of a joint return or surviving spouse ($248,300 in the case of married, filing separate), $469,050 in the case of head of household, $441,450 in the case of any other individual, and $13,150 in the case of an estate or trust.
The rate is 20% for all those above the thresholds.
Exemption Amounts for Alternative Minimum Tax (AMT)
- The exemption amounts for AMT are:
- Joint Returns or Surviving Spouses = $113,400
- Unmarried Individuals (other than Surviving Spouse) = $72,900
- Married Individuals Filing Separate = $56,700
- Estates and Trusts = $25,400
- Excess Taxable Income above which the 28% tax rate applies are:
- Married Individuals Filing Separate Returns = $98,950
- Joint Returns, Unmarried Individuals (other than Surviving Spouses), and Estates and Trusts = $197,900
- The amounts used to determine the phase out of the AMT exemption amounts are:
- Joint Returns or Surviving Spouses = $1,036,800
- Unmarried Individuals (other than Surviving Spouses) = $518,400
- Married Individuals Filing Separate = $518,400
- Estates and Trusts = $84,800
The standard deduction amounts are:
- Joint Returns and Surviving Spouses = $24,800
- Head of Household = $18,650
- Unmarried Individuals (other than Surviving Spouses and Head of Household) = $12,400
- Married Individuals Filing Separate = $12,400
Election to Expense Certain Depreciable Assets
- The aggregate cost of any section 179 property a taxpayer elects to treat as an expense cannot exceed $1,040,000 – the deduction limitation.
- The cost of any sport utility vehicle that may be acquired as an expense under section 179 cannot exceed $25,900.
- Costs exceeding $2,590,000 – “reduction of the deduction limitation”. If the property placed in service during the year costs more than $2,590,000, then the limitation for any taxable year must be reduced by the dollar amount of costs exceeding $2,590,000. There is no section 179 deduction for the costs of property in excess of $3,590,000 placed in service during the year.
Qualified Business Income
The threshold amount for beginning the phase out of the Qualified Business Income deduction amount is:
- Joint Returns = $326,600
- Married Filing Separate and all other returns = $163,300
For a complete list of all the updates to the inflation-adjusted numbers for calendar year 2020, please see Rev. Proc. 2019-44.