It’s tax time, so what’s new? Every year tax laws are created, income thresholds are updated due to inflation, and credits and deductions are renewed or sun-setted. Everyone should pay attention to these numbers so they can adjust their strategy and take advantage of any possible tax benefits. We’ve included a helpful tool that lays out many of the 2020 Important Tax Numbers, click here to download.
Federal tax brackets & rates for 2020 & 2021
At the federal level, there are seven tax brackets that range from 10% to 37%. Each rate applies to its own tax bracket and is based on your filing status. You have four filing statuses to choose from: single, married filing jointly, married filing separately, or head of household.
The federal tax brackets are progressive meaning each dollar is taxed at the bracket where it is earned. This means for 2020, your first $9,875 of income is taxed at 10%. However, dollar number 9876 would be taxed at 12% and so forth up the chart.
Single
| Tax Rate | 2020 Taxable Income Brackets | 2021 Taxable Income Brackets |
| 10% | $0 – $9,875 | $0 – $9,950 |
| 12% | $9,876 – $40,125 | $9,951 – $40,525 |
| 22% | $40,126 – $85,525 | $40,526 – $86,375 |
| 24% | $85,526 – $163,300 | $86,376 – $164,925 |
| 32% | $163,301 – $207,350 | $164,926 – $209,425 |
| 35% | $207,351 – $518,400 | $209,426 – $523,600 |
| 37% | $518,401 + | $523,601 + |
Married Filing Jointly
| Tax Rate | 2020 Taxable Income Brackets | 2021 Taxable Income Brackets |
| 10% | $0 – $19,750 | $0 – $19,900 |
| 12% | $19,751 – $80,250 | $19,901 – $81,050 |
| 22% | $80,251 – $171,050 | $81,051 – $172,750 |
| 24% | $171,051 – $326,600 | $172,751 – $329,850 |
| 32% | $326,601 – $414,700 | $329,851 – $418,850 |
| 35% | $414,701 – $622,050 | $418,851 – $628,300 |
| 37% | $622,051 + | $628,301 + |
Deductions and Limitations
Standard Deduction
| Filing status | 2020 Standard Deduction Amount | 2021 Standard Deduction Amount |
| Single | $12,400 | $12,550 |
| Married filing jointly & surviving spouse | $24,800 | $25,100 |
| Married filing separately | $12,400 | $12,550 |
| Head of household | $18,650 | $18,800 |
Medical and Dental Expense
Once your medical and dental expenses exceed 7.5% of your AGI, you can deduct them on your 2020 and 2021 tax returns, if you choose to itemize.
Retirement Contribution Limits
Most employers offer some type of retirement plan with many choosing a 401(k) plan. 401(k)’s can be one of the simplest and effective ways to save for your retirement. As the employee you can choose how much money to contribute to your plan each pay period. However, there are limitations on how much you can contribute. Each year, the Internal Revenue Service (IRS) reviews and adjusts the maximum contribution limits for 401(k) plans, individual retirement accounts (IRAs), and other retirement savings tools.
Your 401k contribution limits are $19,500 a year with a catch-up contribution of $6,500 for those over 50 years old. If your self-employed, or have access to several different plans you are limited to a combined total of $57,000 (2020) and $58,000 (2021) for the year. If you’re a high saver, ensure your contributions are withheld and take advantage of these tax-advantaged savings tools.
Your IRA contribution limits are $6,000 a year with a catch-up contribution of $1,000 for those over 50 years old. There are income limitations for contributing to both a Traditional IRA and a Roth IRA, so ensure you pay attention.
Health Savings Accounts
Health Savings Account contributions increased up to $3,550 for individuals, or $7,100 per family.
HSAs were implemented in 2004 through a change in the Internal Revenue Code to allow an individual to deduct HSA contributions from their taxes. An HSA is not something you purchase like private insurance; rather it’s a savings account into which you can deposit money on a pre-tax basis. The only product you purchase with an HSA is a High-Deductible Health Plan (HDHP), which is a requirement and will cover you should your medical expenses exceed your annual deductible. You will have two components of coverage; the HDHP and the HSA.
The tax benefits of HSAs are quite significant. Eligible individuals can make tax-deductible contributions to HSA accounts and since funds in the account may be invested there is an opportunity for tax-free growth just like your IRA or 401(k) retirement savings plan. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are also tax-free. Because healthcare suffers from significant inflation, the ability to invest and grow the premium to keep abreast, or even in some cases outpace inflation, is a tremendous advantage.
Required Minimum Distributions (RMD)
The Secure Act raised Required Minimum Distributions (RMD) from 70 ½ to 72 years of age. Americans are working longer and will no longer be required to withdraw assets from IRAs and 401(k)s at age 70½ as RMDs now begin at age 72 for individuals who turned 70½ in the calendar year 2020.
You can make Traditional IRA contributions beyond age 70½. As Americans live longer, an increasing number are continuing to work past their traditional retirement age. You can continue to contribute to your traditional IRA past age 70½ as long as you are still working and have earned income. That means the rules for traditional IRAs will align more closely with 401(k) plans and Roth IRAs.
Mortgage Interest Deduction
If you take out a mortgage to buy, build, or renovate to improve your home, you can deduct the interest you pay on the mortgage.
In 2020, this deduction is limited to mortgage debt – or home acquisition debt – up to $750,000. If your status is married filing separately, it’s limited to debt up to $375,000. Typically, any interest that exceeds these amounts isn’t tax-deductible.
If your mortgage was created before the Tax Cuts and Jobs Act passed in 2017, it’s grandfathered in. Old deduction rules apply. In that case, you can deduct interest up to $1 million of mortgage debt plus an additional $100,000 of equity debt.
You have to itemize to claim this deduction, which may seem obvious because these amounts could be far greater than the standard deduction.
Charitable Donations
Do you donate to public organizations? If so, you can deduct charitable cash donations up to 100% of your AGI in 2020 and 2021 – if you itemize. If you don’t itemize, you can claim a deduction for cash donations up to $300 on your 2020 and 2021 returns.
The CARES Act and Consolidated Appropriations Act, 2021 increased the AGI limit to 100% from 50% and created the $300 deduction. These changes are meant to incentivize charitable giving during the COVID-19 pandemic.
Gifting
In 2020 and 2021, you can give up to $15,000 to someone in a year without having to submit a gift tax return. If you give more than $15,000 in cash or assets in a year to any one person, you will need to file a gift tax return. That doesn’t mean you have to pay a gift tax because you would have to gift more than 11.58 million over your lifetime cap before you start paying tax. However, you will need to file IRS Form 709 to disclose the gift.
Keep in mind, the annual exclusion is per recipient, per year. That means you can give $15,000 to your nephew, another $15,000 to a friend, another $15,000 to your children all in the same year without having to file a gift tax return.
The annual exclusion also is per person, which means that if you’re married, you and your spouse could give away a combined $30,000 a year to each individual without having to file a gift tax return.
Gifts between spouses are unlimited and generally don’t trigger a gift tax return.
