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.
- Business income: The 2020 qualified business income for married individuals filing jointly increases to $326,600. For married individuals filing separately, it is raised to $163,300.
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.
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