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If you are a member of the bookkeeping or accounting community, you know how important it is to stay on top of any changes in tax law. Inflation is often considered a negative term. However, at the end of 2109, the Internal Revenue Service released the inflation adjustments for 2020. The result is many increased tax deductions. Here’s a rundown of some of the most important changes that will be used on tax returns filed beginning with the year 2021.

Inflation Adjustments to Tax Deductions

  • Married filing jointly: For the tax year 2020, the standard deduction for a married couple filing jointly increases to $24,800. This is a rise of $400 from the previous year.
  • Married filing separately and single filing: The 2020 standard deduction increases by $200, to $12,400.
  • Heads of households: For 2020 the standard filing increases by $300 to $18,650.

Tax Exemptions

  • Personal exemption: As it was in 2019, the personal exemption remains at zero.
  • Itemized deductions: As in 2019 and 2018, itemized deductions have no limitations.
  • Alternative minimum exemption: The Alternative Minimum Tax exemption for 2020 for married individuals filing jointly begins at $113,400. It phases out at $1,036,800.
  • Earned income credit: Qualifying taxpayers who have three or more children, have a maximum earned income credit of $6,660 for 2020. This is an increase of $103 from 2019.
  • Transportation fringe benefit: The 2020 inflation adjustments include an increase in the monthly limitation to $270. This means a raise on the limitation or qualified parking from $265 in the 2019 tax year.

Healthcare and Learning

  • Healthcare flexible spending: In 2020, the IRS raised the limitation for HFS employee salary to $2,750.
  • Lifetime learning credit:  This affects individuals who are filing jointly. The gross income amount reduction in LLC is raised to $118,000 in 2020. This is an increase from $116,000 for the tax year 2019.
  • Foreign earned income exclusion: The 2020 inflation adjustment for foreign earned income exclusion is increased from the 2019 tax year of $105,900 to $107,600.
  • Decedent taxes: Decedents who die in 2020 have an estate exclusion amount of $11,580,000. This is a $180,000 increase from 2019.
  • Monetary gifts: For 2020, the annual exclusion for gifts remains the same at 15,000.
  • Adoption credit: The maximum qualifying adoption credit for 2020 is $14,300.

Inflation Adjustments and Medical Savings

  • Medical savings: For individuals who have a self-only Medical Savings account, the plan must have a minimum annual deduction of $2,350 and a maximum of $3,550 for 2020. The maximum out-of-pocket expense for self-only coverage is $4,750. This is an increase of $100 from 2019. Individuals who have family coverage will see an increase in annual deductibles to $4,750. The maximum deductible will increase to $7,100 for 2020. For family coverage, the maximum for the out-of-pocket expense is $8,650.

Penalties

  • Penalties for failing to file taxes: Individuals who miss a filing their return by April 15th, 2020 or their extension by October 15th, 2020 will be eligible for penalties of between 5% up to 25% for every month it is late. These penalties will not apply for people who do not file on time who are expecting a tax refund.
  • Penalties for failing to pay taxes: Individuals who miss paying their return must pay 0.5% of the tax owed each month up to a 25% maximum.

Having difficulties adjusting to the 2020 inflation adjustments? Our team at On Track Bookkeeping can help. We have a team of professionally trained bookkeepers who specialize in QuickBooks. We can assist with a diverse range of industries. If you’re a new entrepreneur and you need a bookkeeping system custom made to your business and personal preferences, we are there for you every step of the way. We’ll handle your bookkeeping needs from the moment you call. From then on, your business finances will be seamless. Contact us today to find out more about how we can help you successfully build your business.

Corinna Underwood

Author Corinna Underwood

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