Whether COVID-19 Affected Your Financial Standings or Not, It's Important to Know: What Is My Tax Bracket for the 2020 Tax Year?
With the tax season officially upon us, it's likely you'll be reaching out to your CPA or financial planner to begin the tax filing process shortly (if you haven't already). Before doing so, it may be helpful to know what your tax bracket will likely be this year - especially if COVID-19 impacted your earnings.
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. Because of this, it's possible 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.1
Reminder: 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 are a single filer who made $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
With the onset of COVID-19 and the resulting economic downturn, millions of Americans lost their jobs and business owners were forced to cease operation for months at a time. If your income was impacted by the financial hardships caused by COVID-19, you may fall into a different tax bracket this filing season as well.
2020 Tax Brackets:
Without further ado, here are the 2020 tax brackets according to your filing status and income from the IRS.1
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 $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.
More questions?
Do you have questions regarding taxes, financial planning, and/or student loan planning? If so, click on the link below to schedule a FREE consultation with Patrick Logue CFP®, CSLP®. Patrick is a CERTIFIED FINANCIAL PLANNER(TM) and Certified Student Loan Planner(R). He is also a Level 3 tax professional. https://www.prudentfinancialplan.com/schedule-an-appointment
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https://www.irs.gov/pub/irs-drop/rp-19-44.pdf
https://www.aier.org/article/bracket-creep-a-real-problem-for-taxpayers/
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
