Mehmet E. Akgul
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Covers investment, financial analysis and related financial market issues for BrightHedge. He has extensive experience in portfolio management, business consulting, risk management, and accounting areas.
2020 Federal Income Tax Brackets
- by Mehmet E. Akgul
- January 9, 2020
The IRS adjusted more than 60 tax provisions for 2020 annual inflation adjustments. These adjustments are generally used on tax returns filed on 2021.
2020 IRS Tax Brackets and Rates
(for taxes due in April 2021)
2020 Single Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 9,875 | 10% |
| USD 9,875 | USD 40,125 | USD 987.50 + 12% |
| USD 40,125 | USD 85,525 | USD 4,617.50 + 22% |
| USD 85,525 | USD 163,300 | USD 14,605.50 + 24% |
| USD 163,300 | USD 207,350 | USD 33,271.50 + 32% |
| USD 207,350 | USD 518,400 | USD 47,367.50 + 35% |
| USD 518,400 | . . . . . . | USD 156,235.00 + 37% |
2020 Married Filing Jointly Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 19,750 | 10% |
| USD 19,750 | USD 80,250 | USD 1,975.00 + 12% |
| USD 80,250 | USD 171,050 | USD 9,235.00 + 22% |
| USD 171,050 | USD 326,600 | USD 29,211.00 + 24% |
| USD 326,600 | USD 414,700 | USD 66,543.00 + 32% |
| USD 414,700 | USD 622,050 | USD 94,735.00 + 35% |
| USD 622,050 | . . . . . . | USD 167,307.50 + 37% |
2020 Married Filing Separately Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 9,875 | 10% |
| USD 9,875 | USD 40,125 | USD 987.50 + 12% |
| USD 40,125 | USD 85,525 | USD 4,617.50 + 22% |
| USD 85,525 | USD 163,300 | USD 14,605.50 + 24% |
| USD 163,300 | USD 207,350 | USD 33,271.50 + 32% |
| USD 207,350 | USD 311,025 | USD 47,367.50 + 35% |
| USD 311,025 | . . . . . . | USD 83,653.75 + 37% |
2020 Head of Household Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 14,100 | 10% |
| USD 14,100 | USD 53,700 | USD 1,410.00 + 12% |
| USD 53,700 | USD 85,500 | USD 6,162.00 + 22% |
| USD 85,500 | USD 163,300 | USD 13,158.00 + 24% |
| USD 163,300 | USD 207,350 | USD 31,830.00 + 32% |
| USD 207,350 | USD 518,400 | USD 45,926.00 + 35% |
| USD 518,400 | . . . . . . | USD 154,793.50 + 37% |
How to Calculate Tax Due and Effective Tax Rate?
Let’s assume that your taxable income (after USD 24,800 standard deduction and consider no credits for simplicity) is USD 84,000 and you are filing as married filing jointly. Your marginal tax rate is 22%. Now we will calculate your effective tax rate and the tax due. We will use the 10% tax rate on your income up to USD 19,750, the 12% tax rate on taxable income between USD 19,750 and USD 80,250, and 22% on the part of your taxable income over USD 80,250.
Here are our calculations;
USD 84,000 – USD 80,250 = USD 3,750
USD 3,750 x 22% = USD 825
USD 9,235 + USD 825 = USD 10,060 → total tax due
USD 10,060 / (USD 84,000 + USD 24,800)= 9,25% → effective tax rate
2020 Standard Deduction
| Filing Status | Deduction Amount |
|---|---|
| Single or Married filing separately | USD 12,400 |
| Married filing jointly or Qualifying widow(er) | USD 24,800 |
| Head of household | USD 18,650 |
The standard deduction for people who are over age 65 is USD 14,050 for single taxpayers, and USD 27,400 for married filing jointly taxpayers.
2020 Alternative Minimum Tax (AMT)
The AMT is an additional income tax under the current tax law. The AMT was created in 1969 to ensure that high-income taxpayers could not avoid taxes by using various tax shelters. The AMT adjusts high taxable income of taxpayers by setting limits on certain tax benefits. The taxpayers calculate the tentative minimum tax and the regular tax and are required to pay the excess amount if any.
2020 Alternative Minimum Tax Exemption
| Filing Status | Exemption Amount |
|---|---|
| Single or Head of household | USD 72,900 |
| Married filing jointly or Qualifying widow(er) | USD 113,400 |
| Married filing separately | USD 56,700 |
2020 Alternative Minimum Tax Brackets
| Filing Status | 26% AMT Tax Rate | 28% AMT Tax Rate |
|---|---|---|
| Married filing separately | AMTI up to USD 98,950 | excess AMTI of USD 98,950 |
| All other filers | AMTI up to USD 197,900 | excess AMTI of USD 197,900 |
To avoid a heavy tax burden for low- and middle-income taxpayers, IRS requires taxpayers to calculate alternative minimum taxable income (AMTI) with additional deductions and exemptions to determine the taxable income.
2020 Alternative Minimum Tax Exemption Phaseout Thresholds
| Filing Status | Threshold |
|---|---|
| Married filing jointly | USD 1,036,800 |
| All other filers | USD 518,400 |
How to Calculate Alternative Minimum Tax?
Using the same facts above for regular tax calculation, we need to add back standard deduction in our AMT calculation. Assume that the married filing jointly couple has an incentive stock option of USD 50,000.
The calculation is as follows;
USD 84,000 + USD 24,400 + USD 50,000 = USD 158,400 → Alternative minimum taxable income
USD 158,400 – USD 113,400 = USD 45,000
USD 45,000 x 26% = USD 11,700 → alternative minimum tax, which is higher than regular tax amount of USD 10,060 (calculated above)
Therefore, the taxpayer needs to pay additional USD 1,640 with alternative minimum tax.
2020 Long-Term Capital Gains Tax Rate
| Long-term capital gains tax rate | Single | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 0% | USD 0 to USD 40,000 | USD 0 to USD 80,000 | USD 0 to USD 40,000 | USD 0 to USD 53,600 |
| 15% | USD 40,001 to USD 441,450 | USD 80,001 to USD 496,600 | USD 40,001 to USD 248,300 | USD 53,601 to USD 469,050 |
| 20% | USD 441,451 or more | USD 496,601 or more | USD 248,301 or more | USD 469,051 or more |
When you hold an asset for one year or less, the capital gain is defined as a short-term capital gain. Short-term capital gains are taxed as ordinary income.
How to Calculate Short- and Long-Term Capital Gains Tax?
Assume that you bought 500 shares of ABC stock at USD 20 per share and sold these shares at USD 25 per share. Your ordinary income is USD 108,400 and filed as married filing jointly.
Note: Ordinary income includes wages, salaries, interests, dividends, bonds (except municipal bonds).
If you hold these stocks less than a year (short-term capital gains tax);
(500 shares x USD 25) – (500 shares x USD 20) = USD 2,500 → capital gain
USD 2,500 x 20% = USD 500 → short-term capital gain tax
If you hold these stocks for more than a year (long-term capital gains tax);
(500 shares x USD 25) – (500 shares x USD 20) = USD 2,500 → capital gain
USD 2,500 x 15% = USD 375 → long-term capital gain tax
2020 Gift Tax Exclusion and Estate Tax Exemption
For 2020, the annual gift tax exclusion to gifts to each donee is USD 15,000.
The estate tax exemption is USD 11,580,000 per decedent.
Buttom Line
While we try to simplify federal income tax brackets for individual taxpayers to figure the tax bill, you also need to consider whole tax forms and instructions for tax credits and deductions to lower your tax bracket.
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