Finding out next year’s tax rates and brackets can help you get a jump on tax planning or make important decisions before the current year ends. In this article, we’ll look at changes in 2020 taxes and what causes our taxes to change every year.
How Are Tax Brackets Determined?
Before each new tax year, the IRS publishes the upcoming tax rates and brackets. While the seven tax rates for 2020 haven’t changed from 2019, the brackets or income levels have changed, since income brackets generally change each year due to inflation adjustments.
Before 2019, the standard Consumer Price Index (CPI) was used to calculate inflation, which adjusts tax brackets. To better account for changes in spending due to price increases, the calculation now uses a chained CPI. The standard CPI is based on a fixed basket of common goods, whereas the chained CPI allows for the substitution of similar goods due to changing consumer buying habits when prices increase. For example, when the price of beef increases, the index accounts for consumers buying more chicken.
Generally, economists have learned that chained CPI increases less than the rate of inflation. According to Brookings.edu, between 2000 and 2017, the standard CPI rose by 45.7% while the chained CPI rose by only 39.7%. The net effect is that people with incomes that are increasing faster than inflation may find they’ve been pushed into a higher bracket. In a way, the calculation change is similar to an additional tax for people moving into higher brackets due to the slower inflation rate of increase.
2020 Rates
On November 6, 2019, the IRS released inflation-adjusted numbers for the tax year beginning January 1, 2020. These are the numbers that will be used to prepare 2020 tax returns when those returns come due in 2021.
Short-term taxes — there’s been no change in short-term gains. They are still taxed at ordinary income tax rates. 2020 tax rates are also the same as 2019 rates: 10%, 12%, 22%, 24%, 32%, 35%, 37%. 2020 tax brackets, as shown below, were adjusted from 2019:
|
Tax Rate |
Single |
Married Filing Jointly |
Married Filing Separately |
Head of Household |
|
10% |
Up to $9,875 |
Up to $19,750 |
Up to $9,875 |
Up to $14,100 |
|
12% |
$9,876 to $40,125 |
$19,751 to $80,250 |
$9,876 to $40,125 |
$14,101 to $53,700 |
|
22% |
$40,126 to $85,525 |
$80,251 to $171,050 |
$40,126 to $85,525 |
$53,701 to $85,500 |
|
24% |
$85,526 to $163,300 |
$171,051 to $326,600 |
$85,526 to $163,300 |
$85,501 to $163,300 |
|
32% |
$163,301 to $207,350 |
$326,601 to $414,700 |
$163,301 to $207,350 |
$163,301 to $207,350 |
|
35% |
$207,351 to $518,400 |
$414,701 to $622,050 |
$207,351 to $311,025 |
$207,351 to $518,400 |
|
37% |
Over $518,400 |
Over $622,050 |
Over $311,025 |
Over $518,400 |
Long-term gains — long-term rates have remained the same as 2019, but as expected, brackets have adjusted up.
|
Single |
Married Filing Jointly |
Heads of Households |
|
|
0% |
0-$39,999 |
0-$79,999 |
$0-$53,599 |
|
15% |
$40,000-441,449 |
$80,000-$496,599 |
53,600-$460,049 |
|
20% |
441,450+ |
$496,600+ |
$469,050+ |
The Net Investment Income (NII) tax is still in effect. Its rate hasn’t changed from 2019’s 3.8% on long-term capital gains for single filers who have a modified adjusted gross income (MAGI) of more than $200,000 and married filers with a MAGI of more than $250,000.
Knowing your tax rates and brackets are important for next year’s tax planning. Knowing next year’s tax rates before the current year has ended can mean making decisions about selling or acquiring properties or other assets, depending on how your gains are affected and what tax bracket you might end up in. As you can imagine, it’s also important to discuss such moves with your tax professional, who can help you in avoiding potentially costly mistakes.
