Inflation Adjustments Increase Tax Deductions for 2020

Posted on Thu, Nov 14, 2019 ©2021 Drucker & Scaccetti

irs-logo-resized-600By: Eric R. Elmore

 

Often, “inflation’ is a bad word for economists and financial experts to utter.  But last week, the IRS announced its annual inflation adjustments for 2020 and many tax deductions have increased as a result. In today’s post, we’ll get you up to speed on the increased deductions available in 2020. Let’s get at it!

 

Revenue Procedure 2019-44 explains these annual adjustments. Some tax law changes in the Revenue Procedure were added by the Taxpayer First Act of 2019, which, among other things, increased the failure to file penalty to $330 for returns due after the end of 2019. The new penalty will be adjusted for inflation beginning with tax year 2021.

 

Many amounts, however, will increase for inflation in 2020. The Standard Deduction will increase $400 to $24,800 for married individuals filing joint returns or surviving spouses, $300 to $18,650 for heads of household, and $200 to $12,400 for unmarried individuals (other than surviving spouses) and married individuals filing separate returns. That’s a good start, but there are other areas affected by the inflation adjustments.

 

The maximum Adoption Credit will increase to $14,300 up from $14,080 in 2019. That is also the maximum amount that will be excludable from an employee’s gross income for qualified amounts paid or expenses incurred by an employer under an adoption-assistance program.

 

The Sec. 179 amount will be $1,040,000 with a phaseout threshold of $2,590,000, slight increases from 2019.

 

The Qualified Business Income threshold will increase to $326,600 for married individuals filing joint returns and to $163,300 for married individuals filing separate returns, single individuals, and heads of household, all increased from 2019.

 

The Foreign Earned Income Exclusion amount will increase to $107,600 from $105,900 in 2019.

 

The basic exclusion amount for determining the unified credit against the estate tax will be $11,580,000 for decedents dying in calendar year 2020, up from $11,400,000 in 2019. The Annual Gift Tax exclusion amount remains at $15,000, but the gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen will increase to $157,000 in 2010 from $155,000 in 2019.

 

The 2020 Alternative Minimum Tax exemption is $72,900 and phases out at $518,400 ($113,400 for married couples filing jointly for whom the exemption phases out at $1,036,800). The 2019 exemption amount was $71,700 and phased out at $510,300 ($111,700, for married couples filing jointly for whom the exemption phased out at $1,020,600).

 

The maximum Earned Income Credit amount will be $6,660 for qualifying taxpayers with three or more qualifying children. That’s an increase from $6,557 for tax year 2019. The revenue procedure contains a table providing maximum credit amounts for other categories, income thresholds and phase-outs.

 

The monthly limitation for the Qualified Transportation Fringe Benefit is $270, as is the monthly limitation for Qualified Parking, up from $265 for tax year 2019.

 

The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.

 

Participants with self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, the same as for tax year 2019; but not more than $3,550, an increase of $50 from tax year 2019. For self-only coverage, the maximum out-of-pocket expense amount is $4,750, up $100 from 2019. For tax year 2020, participants with family coverage, the floor for the annual deductible is $4,750, up from $4,650 in 2019; however, the deductible cannot be more than $7,100, up $100 from the limit for tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020, an increase of $100 from tax year 2019.

For tax year 2020, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $118,000, up from $116,000 for tax year 2019.

 

Various penalty amounts for failure to file tax and information returns or furnish payee statements are also being adjusted for inflation for 2020.

 

All these changes can be quite confusing.  Knowing which ones apply to you can be even more daunting. However, there are some adjustments that may benefit you from a tax perspective. The Tax Warriors® at Drucker & Scaccetti are already on the case for our clients as we visit year-end planning to better position them for 2020 and beyond. If you have questions about previous planning conducted by your current tax advisor, we are happy discuss with you. Contact us to arrange a consultation to discuss and review your previous returns and current tax strategy.

 

 

Topics: Tax Deductions, Lifetime Learning Credit, Earned Income Tax, inflation adjustment, Alternative Minimum Tax, Qualified business income deduction, foreign earned income exclusion, Standard deductions, Qualified Transportation Fringe Benefits, 2020, Adoption credit, Health flexible spending

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