Every year new, tax rates change. Knowing these new tax rates allows taxpayers and tax preparers to know what to expect during tax season.
The new rates for include 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.
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 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%.
Taxes: What can you expect?
On November 6 of 2019, the Internal Revenue Service of the United States published a report with the adjustments made to tax rates based on inflation. Since January 1, 2020, these new tax rates became the new norm, and it’s what you will need to use to prepare your new tax returns.
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.
- 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.
- Retirement planning figures. This section specifies the limits to deductions for retirement savings contributions.
New 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:
|10%||$9,875 or less|
|37%||Greater than $518,400|
Married filing jointly
|10%||$19,750 or less|
|37%||Greater than $622,050|
Married filing separately
|10%||$9,875 or less|
|37%||Greater than $518,400|
|Type of taxpayer||Amount of the deduction|
|Married filing jointly||$24,800|
|Married filing separately||$12,400|
|Head of household||$18,650|
Alternative Minimum Tax Exemption
|Type of taxpayer||Exemption|
|Single||$72,900 and begins to phase out at $518,400|
|Married filing jointly||$113,400 and begins to phase out at $1,036,800|
|Married filing separately||$72,900 and begins to phase out at $518,400|
Other tax items
- The personal exemption is 0
- Itemized deductions have no limitation
- Qualifying taxpayers with 3 or more children have a maximum Earned Income Credit amount of $6,660
- The fringe benefit for qualified transportation has a monthly limitation for $270
- Employee salary contributions to health flexible spending arrangements has a limit of $2,750
Get ready for the new tax rates
Knowing 2020’s new tax rates will allow you to better plan for the 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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