The IRS recently released the new tax brackets for the 2020 tax year, so now you can start thinking about how to handle your 2020 finances in a tax-efficient way. The seven 2020 tax rates themselves didn’t change (they are the same as those in effect for the 2019 calendar year), however, the tax bracket ranges were modified based on inflation. So, you could be in a different tax bracket for 2020 than the last time you reported your taxes, even if your income has not changed.
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Tax Brackets Are Marginal
The IRS divides income into different tax rates. Each subsequent portion of your income will have an increased tax rate. For example, if you make $40,125 in 2020, your first $9,875 will be taxed at 10 percent. The next portion of your income will be taxed at an increased rate; from $9,875 to $40,125, your tax rate will be 12 percent.
As your income increases, you’ll fall into higher tax brackets and will have a higher tax rate for each portion of your income.
Why Would My Tax Bracket Be Different?
The IRS regularly adjusts tax brackets to take inflation into consideration. This is because, with inflation, people will face higher prices, meaning the purchasing power of their dollar is decreased. Knowing this, the IRS adjusts brackets in order to avoid bracket creep, a circumstance that occurs when inflation pushes your income into a higher tax bracket, or credits and deductions are reduced. In this scenario, an individual may not actually have increased purchasing power or greater disposable income, even with an increase in wages and salaries.2
2020 Tax Brackets
Without further ado, here are the 2020 tax brackets according to your filing status and income from the IRS.
10% Tax Rate
- Single Individuals: from $0 to $9,875
- Married Individuals Filing Jointly: from $0 to $19,750
- Heads of Households: from $0 to $14,100
- Married Individuals Filing Separately: from $0 to $9,875
12% Tax Rate
- Single Individuals: from $9,876 to $40,125
- Married Individuals Filing Jointly: from $19,751 to $80,250
- Heads of Households: from $14,101 to $53,700
- Married Individuals Filing Separately: from $9,876 to $40,125
22% Tax Rate
- Single Individuals: from $40,126 to $85,525
- Married Individuals Filing Jointly: from $80,251 to $171,050
- Heads of Households: from $53,701 to $85,500
- Married Individuals Filing Separately: from $40,126 to $85,525
24% Tax Rate
- Single Individuals: from $85,526 to $163,300
- Married Individuals Filing Jointly: from $171,051 to $326,600
- Heads of Households: from $85,501 to $163,300
- Married Individuals Filing Separately: from $85,526 to $163,300
32% Tax Rate
- Single Individuals: from $163,301 to $207,350
- Married Individuals Filing Jointly: from $326,601 to $414,700
- Heads of Households $163,301 to to $207,350
- Married Individuals Filing Separately: from $163,301 to $207,350
35% Tax Rate
- Single Individuals: $207,351 to $518,400
- Married Individuals Filing Jointly: from $414,701 to $622,050
- Heads of Households: from $207,351 to $518,400
- Married Individuals Filing Separately: from $207,351 to $311,025
37% Tax Rate
- Single Individuals: over $518,400
- Married Individuals Filing Jointly: over $622,050
- Heads of Households: over $518,400
- Married Individuals Filing Separately: over $311,025
In addition to the tax inflation adjustments, the IRS also altered standard deductions. While the above rates and brackets are at the federal level, different states might have varying brackets and rates.
If you would like more in-depth advice or if you would like for someone to help you manage your accounts, please give us a call or schedule a Get Acquainted Meeting. We would love to hear from you!
- https://www.irs.gov/pub/irs-drop/rp-19-44.pdf
- https://www.aier.org/article/bracket-creep-a-real-problem-for-taxpayers/
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About Scott
Scott Hamilton is the founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees in Dallas, Houston, and Austin, Texas. With over 20 years of experience in the financial industry, and has completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals.
He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.
