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What are the new tax rates? A quick glance at 2020

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It’s that time of year where fiscal forecasts for next year start to appear. As a matter of fact, a report was recently published with the new tax rates that could be effective as of 2020.

This report foresees the tax savings that taxpayers could get thanks to increases in the limits of the deductions, an increase in the thresholds of tax categories, and many other tax indicators.

Knowing these projections allows taxpayers and tax preparers to know what to expect during tax season

In this article, we explain where tax rates come from, why they change every year, and how they are affected by recent reforms.

We also offer a peek at the most relevant tax rates projected for 2020.

How are tax rates calculated?

Many of the items established in the Internal Revenue Code, or IRC, are adjusted according to the inflation index, which fluctuates depending on the variations in the cost of living. This means that they rely on the increase or decrease in the value of products and services. 

To calculate these adjustments, the Consumer Price Index, or CPI, is not used anymore. Now, there’s a more precise indicator called Chain-Weighted CPI.

The IRS calculates the new tax rates based on this indicator that measures inflation. Inflation and the Chain-Weighted CPI vary continuously, so it is logical that the tax rates also change every year.

To make its estimates, the IRS relies on the Tax Cuts and Jobs Act (TCJA). President Donald Trump signed this law in December 2017.

Its objective is to reduce individual and business tax rates. However, one of the primary purposes of the law is to minimize the corporations’ tax rates to increase their profits and generate new jobs.

The law requires that the Chain-Weighted CPI is used to calculate tax rates, and not based on the traditional CPI, as it was the case in the past. 

What do the new tax rates affect?

These are other ways in which the Tax Cuts and Jobs Act affects tax rates, and consequently, small business owners:

  • Increases standard deductions. The amounts you can deduct from your taxes based on your income and marital status have increased.
  • Limits local and state income tax deductions. As of 2018, taxpayers who specify their deductions can deduct their individual income and state property sales for up to $10,000.
  • Some businesses have deductions of up to 20%. Limited Liability Companies, S corporations, and sole proprietorships can deduct up to 20% of their income in the personal tax returns of their partners, investors or owners.
  • It reduces taxes for C corporations. The tax rate for large companies falls from 35% to 21%.

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Taxes: What can you expect next year?

On September 12, the Bureau of Labor Statistics of the United States published a report with the summary of consumer price indices, which takes into consideration the cost of living of a 12-month that ended on 31 August. 

Based on this information, analysts such as Bloomberg Tax & Accounting forecast the new tax rates that will govern the following year. 

Recently, this consulting firm released its report with projections of the tax rates that could be the norm during 2020. 

The report can be downloaded here.

Before continuing with the details of the report, we want to reiterate that these figures do not correspond to the year 2019, but 2020, and clarify that these are projections, not official information. 

For small business owners, this report helps them plan for next year so that they can identify the best opportunities to save money.

What can you find in the report?

  • Tax brackets. They refer to the income ranges subject to a specific income tax rate. 

These brackets exist because the tax system of the US is progressive, which means that people with higher taxable income pay more taxes.

  • Projected penalty amounts. This section estimates how much penalties will cost. These include penalties for not filing tax returns, for not paying taxes, and for not presenting the correct information.
  • Projected retirement planning figures. This section specifies the limits to deductions for retirement savings contributions.

New projected tax rates for 2020

These are some of the new tax rates and the most relevant tax adjustments for small businesses and other taxpayers, according to the report:

Single individuals

Tax brackets 
10% $0 to $9,875
12% $9,876 up to $40,125
22% $40,126 up to $85,525
24% $85,526 up to $163,300
32% $163,301 up to $207,350
35% $207,351 up to $518,400
37% $518,401 or more

Married filing jointly

Tax brackets 
10% $0 up to $19,750
12% $19,751 up to $80,250
22% $80,251 up to $171,050
24% $171,051 up to $326,600
32% $326,601 up to $414,700
35% $414,701 up to $622,050
37% $622,051 or more

Married filing separately

Tax brackets 
10% $0 to $9,875
12% $9,876 up to $40,125
22% $40,126 up to $85,525
24% $85,526 up to $163,300
32% $163,301 up to $207,350
35% $207,351 up to $311,025
37% $311,026 or more

Standard Deductions

Type of taxpayer Amount of the deduction
Single $12,400
Married filing jointly $24,800
Married filing separately $12,400
Head of household $18,650

Get ready for the new tax rates

Even if these are only projections, knowing in advance 2020’s new tax rates will allow you to better plan for next year, at least tax-wise.

Understanding these indicators and the tax laws of the United States will also help you better manage your business finances.

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