On a yearly basis the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent what is called “bracket creep,” when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any increase in real income.
The IRS used to use the Consumer Price Index (CPI) to calculate the past year’s inflation.[1] However, with the Tax Cuts and Jobs Act of 2017, the IRS will now use the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.
2020 Federal Income Tax Brackets and Rates
In 2020, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Table 1). The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $518,400 and higher for single filers and $622,050 and higher for married couples filing jointly.
| Rate | For Single Individuals | For Married Individuals Filing Joint Returns | For Heads of Households |
|---|---|---|---|
| 10% | Up to $9,875 | Up to $19,750 | Up to $14,100 |
| 12% | $9,876 to $40,125 | $19,751 to $80,250 | $14,101 to $53,700 |
| 22% | $40,126 to $85,525 | $80,251 to $171,050 | $53,701 to $85,500 |
| 24% | $85,526 to $163,300 | $171,051 to $326,600 | $85,501 to $163,300 |
| 32% | $163,301 to $207,350 | $326,601 to $414,700 | $163,301 to $207,350 |
| 35% | $207,351 to $518,400 | $414,701 to $622,050 | $207,351 to $518,400 |
| 37% | $518,401 or more | $622,051 or more | $518,401 or more |
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Source: Internal Revenue Service |
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Standard Deduction and Personal Exemption
The standard deduction for single filers will increase by $200, and by $400 for married couples filing jointly (Table 2).
The personal exemption for 2020 remains eliminated.
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Source: Internal Revenue Service |
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| Filing Status | Deduction Amount |
|---|---|
| Single | $12,400 |
| Married Filing Jointly | $24,800 |
| Head of Household | $18,650 |
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.
The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subjected to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.
The AMT exemption amount for 2020 is $72,900 for singles and $113,400 for married couples filing jointly (Table 3).|
Source: Internal Revenue Service |
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| Filing Status | Exemption Amount |
|---|---|
| Single Individuals | $72,900 |
| Married Filing Jointly | $113,400 |
In 2020, the 28 percent AMT rate applies to excess AMTI of $197,900 for all taxpayers ($98,950 for married couples filing separate returns).
AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. In 2020, the exemption will start phasing out at $518,400 in AMTI for single filers and $1,036,800 for married taxpayers filing jointly (Table 4).
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Source: Internal Revenue Service |
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| Filing Status | Threshold |
|---|---|
| Single Individuals | $518,400 |
| Married Filing Jointly | $1,036,800 |
Earned Income Tax Credit
The maximum Earned Income Tax Credit in 2020 for single and joint filers is $538, if there are no children (Table 5). The maximum credit is $3,584 for one child, $5,920 for two children, and $6,660 for three or more children. All these are relatively small increases from 2019.
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Source: Internal Revenue Service |
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| Filing Status | No Children | One Child | Two Children | Three or More Children | |
|---|---|---|---|---|---|
| Single or Head of Household | Income at Max Credit | $7,030 | $10,540 | $14,800 | $14,800 |
| Maximum Credit | $538 | $3,584 | $5,920 | $6,660 | |
| Phaseout Begins | $8,790 | $19,330 | $19,330 | $19,330 | |
| Phaseout Ends (Credit Equals Zero) | $15,820 | $41,756 | $47,440 | $50,954 | |
| Married Filing Jointly | Income at Max Credit | $7,030 | $10,540 | $14,800 | $14,800 |
| Maximum Credit | $538 | $3,584 | $5,920 | $6,660 | |
| Phaseout Begins | $14,680 | $25,220 | $25,220 | $25,220 | |
| Phaseout Ends (Credit Equals Zero) | $21,710 | $47,646 | $53,330 | $56,844 | |
Child Tax Credit
The child tax credit totals at $2,000 per qualifying child and is not adjusted for inflation. However, the refundable portion of the Child Tax Credit is adjusted for inflation but will remain at $1,400 for 2020.
Capital Gains
Long-term capital gains are taxed using different brackets and rates than ordinary income.
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Source: “2020 Tax Brackets,” Tax Foundation and IRS Topic Number 559 |
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| For Unmarried Individuals | For Married Individuals Filing Joint Returns | For Heads of Households | ||
|---|---|---|---|---|
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Taxable Income Over |
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| 0% | $0 | $0 | $0 | |
| 15% | $40,000 | $80,000 | $53,600 | |
| 20% | $441,450 | $496,600 | $469,050 | |
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Additional Net Investment Income Tax |
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| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 | |
Qualified Business Income Deduction (Sec. 199A)
The Tax Cuts and Jobs Act includes a 20 percent deduction for pass-through businesses against up to $163,300 of qualified business income for single taxpayers and $326,600 for married taxpayers filing jointly (Table 7).
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Source: Internal Revenue Service |
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| Filing Status | Threshold |
|---|---|
| Single Individuals | $163,300 |
| Married Filing Jointly | $326,600 |
Annual Exclusion for Gifts
In 2020, the first $15,000 of gifts to any person is excluded from tax. The exclusion is increased to $157,000 for gifts to spouses who are not citizens of the United States.