There are a number of significant tax updates that you should know about. Establishing a clear picture of these updates that are just over the horizon will give you 20/20 insight into the questions your employees are bound to ask as these changes go into effect. This will help you adjust their withholding and make other important changes.
Capital Gains Rates Do Not Change
The capital gains rate will not be changed in 2020, however, the brackets are changing. Most individuals will pay a maximum 15% on capital gains, however, a 20% tax rate will be applied for individuals who exceed the ordinary 37% rate.
Tax Bracket Changes
Income tax brackets are rising slightly and are as follows:
37% for income of more than $510,300
35% for income more than $204,100 but not higher than $510,300
32% for income more than $160,725 but not higher than $204,100
24% for income more than $84,200 but not higher than $160,725
22% for income more than $39,475 but not higher than $84,200
12% for income more than $9,700 but not higher than $39,475
10% for incomes of $9,700 or less
Alimony Deductions Eliminated
Alimony payments are no longer deductible. For individuals with divorce or separation agreements made or modified in 2019, this means they can no longer write these payments off on their taxes.
Retirement Contributions Raised
The limits for 401(k), IRAs, and other retirement plans have been raised. Going forward, the new limits are $19,000 for 401(k) plans, $6,000 for 401(k) catch-up contributions, $6,000 for IRA base contribution, and $1,000 for IRA catch-up contributions. In order to qualify for the catch-up contribution, individuals must be 50 years or older.
ACA Penalty Dropped, HSA Limits Raised
There is no longer a tax penalty for individuals who choose not to purchase a health plan. However, some states still require purchasing insurance under their own health insurance mandate. Additionally, the maximum contribution limits for individuals contributing to health savings accounts have been raised. Going forward, the maximum contribution for self-only coverage is $3,500 and family coverage is $7,000.
Schedule A Medical Expense Threshold
The threshold for medical expenses for Schedule A is reverting back to 10% of adjusted gross income.
Alternative Minimum Tax (AMT) Exemptions Raised
The AMT for 2019 has been raised for inflation. The new AMT exemptions are $71,700 for singles, $111,700 for married filing jointly, $55,850 for married filing separate, and $25,000 for estates.
Personal Exemptions Eliminated, but Standard Deductions Raised
The TCJA eliminates personal exemption amounts. This means individuals cannot claim themselves, spouses, or dependents. However, the standard deductions are higher. For married filing jointly, the new deduction is $24,400, for married filing separately it is $12,200, head of household is $18,350, and single is $12,200.
We encourage you to contact Greenlink Payroll at (480) 385-2525 for more information about tax updates in 2020. It’s our pleasure to answer your questions and help you find the solutions that are best for your business.