Certain year-end individual tax planning strategies are important to consider as you prepare for tax-time every year. Annual cost-of-living adjustments, individual income tax brackets, gift and estate tax changes, retirement plan options, and various credits are recurring taxation issues to be aware of, as they can impact your overall tax situation.
Cost-of-Living Adjustments for 2020
One item to keep in mind when conducting your year-end individual tax planning is how cost of living adjustments affect certain items such as tax brackets, tax credits, and exemptions. The IRS’ 2020 cost-of-living adjustments indicate that several amounts have increased while others have stayed the same as they had been in 2019. You may want to take into account the 2020 adjustments while you begin your year-end planning for 2019.
The Tax Cuts and Jobs Act (TCJA), makes permanent a new method of adjusting inflation known as the chained CPI which tends to rise more slowly than the traditional CPI measure. This new method will push taxpayers into higher brackets more quickly as their income rises while simultaneously diminishing the worth of certain tax breaks over a period of time.
Individual Income Tax Brackets
The foundation of year-end individual tax planning begins with an examination of the tax bracket you fall into. Though 2020 tax-bracket thresholds have increased across-the-board for each of the filing statuses (i.e. single, head of household, married filing jointly or separately), the higher tax brackets experienced a more significant increase.
2020 Ordinary Income Tax Brackets
|Tax rate||Single||Head of household||Married filing jointly or surviving spouse||Married filing separately|
|10%||$0 – $9,875||$0 – $14,100||$0 – $19,750||$0 – $9,875|
|12%||$9,876 – $40,125||$14,101 – $53,700||$19,751 – $80,250||$9,876 – $40,125|
|22%||$40,126 – $85,525||$53,701 – $85,500||$80,251 – $171,050||$40,126 – $85,525|
|24%||$85,526 – $163,300||$85,501 – $163,300||$171,051 – $326,600||$85,526 – $163,300|
|32%||$163,301 – $207,350||$163,301 – $207,350||$326,601 – $414,700||$163,301 – $207,350|
|35%||$207,351 – $518,400||$207,351 – $518,400||$414,701 – $622,050||$207,351 – $311,025|
|37%||Over $518,400||Over $518,400||Over $622,050||Over $311,025|
Under the TCJA, personal exemptions were disallowed through 2025, while, at the same time, the standard deduction nearly doubled (this is indexed annually for inflation through 2025). For married couples filing jointly, the standard deduction for 2020 is $24,800, but drops to $18,650 for heads of households, and $12,400 for singles and married couples filing separately. These amounts are expected to revert to the amounts in existence prior to the time that the TCJA went into effect after 2025.
This is one of the more significant changes to affect year-end individual tax planning, particularly for those taxpayers who were accustomed to itemizing their deductions. Changes to the standard deduction may also help some taxpayers make up for the loss of their personal exemptions.
Education and Child-related Tax Breaks and Available Credits
While the benefits of most education and child-related tax breaks remain unchanged for 2020, it’s important to bear in mind that these tax breaks are reduced based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers with a MAGI that exceeds the top range are excluded from capitalizing on the tax breaks while those with a MAGI within the phaseout range can take advantage of a partial break as they look at their year-end individual tax planning. MAGI phaseout ranges have either increased nominally for 2020 or remain mainly the same.
For example, MAGI phaseout ranges have increased in 2020 for the lifetime learning credit, capping out at a maximum of $2,000 per tax return. For joint filers, the range is $118,000–$138,000 (up $2,000 from the prior year range) and for other filing statuses the range is $59,000–$69,000 (up $1,000 from the prior year range).
On the other hand, the MAGI phaseout ranges for the American opportunity credit have stayed the same for 2020 at $160,000-$180,000 for those filing jointly and $80,000-$90,000 for all other filers (with a maximum of $2,500 for each student who is eligible).
In both examples, however, married couples who file separately are mainly ineligible for these credits.
If your MAGI is high enough that you are ineligible for these tax breaks, remember that you might want to claim these credits on an individual tax return filed under your child’s name.
Estate and Gift Exemption Adjustment
Adjusted annually for inflation, both the generation-skipping transfer tax (GST) and the unified gift and estate tax exemption have been increased from $11.40 million in 2019 to $11.58 million in 2020.
The annual gift tax exclusion, which typically doesn’t increase each year remains at $15,000 for 2020.
Planning for Retirement
An important consideration you should review every time you look at your year-end individual tax planning is the contributions you’re making to your retirement plan(s). While there may be fewer opportunities to boost your retirement savings if you’ve already been setting aside the maximum amount allowed, you’ll want to familiarize yourself with the type of limitations allowed and the changes between the 2019 and 2020 limits to see if you can add anything more to enhance your overall retirement plan savings.
Retirement Plan-related Limits
|Type of Limitation||2019 limit||2020 limit|
|Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||$19,000||$19,500|
|Annual benefit for defined benefit plans||$225,000||$230,000|
|Contributions to defined contribution plans||$56,000||$57,000|
|Contributions to SIMPLEs||$13,000||$13,500|
|Contributions to IRAs||$6,000||$6,000|
|“Catch-up” contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans for those age 50 and older||$6,000||$6,500|
|Catch-up contributions to SIMPLEs||$3,000||$3,000|
|Catch-up contributions to IRAs||$1,000||$1,000|
|Compensation for benefit purposes for qualified plans and SEPs||$280,000||$285,000|
|Minimum compensation for SEP coverage||$600||$600|
|Highly compensated employee threshold||$125,000||$130,000|
While your MAGI may decrease or eliminate your ability to take advantage of IRAs, IRA-related MAGI phaseout range limits will all experience an increase for 2020 which may prove beneficial and should figure into your year-end individual tax planning.
If a taxpayer or that taxpayer’s spouse makes contributions to a traditional IRA retirement plan sponsored by their employers, the MAGI phaseout ranges apply to the deductibility of the contributions made. The MAGI phaseout range is particular to each spouse based on whether they participate in an employer-sponsored plan for those taxpayers who are married and filing jointly, as follows. The 2020 phaseout range limits increase by:
- $1,000, to $104,000–$124,000 (for participating spouses)
- $3,000, to $196,000–$206,000 (for non-participating spouses)
- $1,000, to $65,000–$75,000 (for single and head-of-household taxpayers)
Taxpayers with MAGIs that fall into these phaseout ranges can deduct a partial contribution, while those who exceed the range aren’t permitted to deduct any IRA contribution.
However, taxpayers whose deductions are reduced or eliminated are permitted to make non-deductible traditional IRA contributions. The prior $6,000 contribution limit (plus $1,000 catch-up contribution, if applicable, reduced by any Roth IRA contributions) remains unchanged. If your MAGI is too high for you to contribute to a Roth IRA, a non-deductible traditional IRA contribution may be a good solution.
You can contribute to a Roth IRA regardless of whether or not you participate in an employer-sponsored plan though MAGI phaseout range limits may reduce or eliminate your ability to contribute. These limits increase by $3,000 to $196,000–$206,000 for married taxpayers filing jointly, and by $2,000 to $124,000–$139,000 for single and head-of-household taxpayers.
You are allowed to make a partial contribution if your MAGI falls within the applicable range, but can’t contribute if MAGI exceeds the top end of the range.
It’s important to note that married taxpayers who file separately are subject to much lower phaseout ranges whether they’re making contributions to a traditional IRA or a Roth.
As provisions of the TCJA continue to be in effect, there is much to consider when reviewing your year-end individual tax planning. If you need assistance in any of the areas covered above, your Untracht Early advisor is available to assist you.