By Jim Terwilliger
The federal government always keeps us on our toes. Calendar/tax year 2020 is no exception. Most of the numbers coming out of Washington that impact our tax and retirement planning lives are different this year, just as they tend to be every year.
The federal tax framework that was put into place starting in 2018 tax year, however, is still intact. No material changes were made for 2020 (except for any year-end moves Congress may have made after this article was written).
For the second consecutive year, the so-called “chained” CPI was used to adjust most income-tax-related numbers. Defined by the Bureau of Labor Statistics as an alternative CPI, it is based on the idea that in an inflationary environment, consumers will choose less-expensive substitutes. As such, chained CPI is generally lower than CPI. For 2020, the adjustment from 2019 is about 1.5%.
While the difference is subtle between CPI and chained CPI, use of the latter, over time, will make annual income-tax-related adjustments less favorable for taxpayers.
Federal Income Tax. Seven tax brackets, ranging from 10% to 37%, were carried over from 2019 tax year. In 2020, the taxable income range within each of the seven brackets increased by about 1.5%, resulting in a modestly lower tax bill for the same taxable income compared to 2019.
The standard deduction was increased from $12,200 to $12,400 for single taxpayers and from $24,400 to $24,800 for married filing joint. Additional modest deductions, unchanged from 2019, are available for those who are blind or age 65 and older.
The highly generous federal estate tax exclusion saw an increase of about 1.5% from $11.40 million to $11.58 million. The portability provision remains, allowing a married couple to now shield $23.16 million from federal estate taxation. The annual federal gift tax exclusion remains at $15,000 for 2019.
Retirement Accounts. The news is mostly good on this front. Several contribution limits were increased for 2020. They include: 1) 401(k)/403(b)/457 salary-deferral limit increased from $19,000 to $19,500. 2) SEP IRA limit increased from $56,000 to $57,000. 3) SIMPLE IRA limit increased from $13,000 to $13,500.
The catch-up contribution limit for No. 1 for taxpayers age 50 and older increased from $6,000 to $6,500: there is no catch-up for No. 2: and the catch-up contribution limit for No. 3 remains unchanged at $3,000.
For traditional and Roth IRAs, the 2020 contribution and catch-up limits remain unchanged at $6,000 and $1,000, respectively.
The ability to contribute to a traditional IRA now begins to phase out at $104,000 AGI for joint filers and $65,000 for single if covered by an employer retirement plan (vs. $103,000 and $64,000, respectively, in 2019). If only one of a married couple is covered by an employer plan, the phase out begins at $196,000 AGI for joint filers (vs. $193,000 in 2019). There is no phase-out if there is no coverage by an employer plan.
The ability to contribute to a Roth IRA now begins to phase out at $196,000 AGI for joint filers and 124,000 for single (vs. $193,000 and $122,000, respectively, in 2019).
Social Security. Inflation adjustments for Social Security benefits are based on CPI, not chained. This time around, the difference is minimal. The 2019-to-2020 benefit increase is 1.6%. This follows a 2016 increase of 0%, a 2017 increase of 0.3%, a 2018 increase of 2.0% and a 2019 increase of 2.8%. The ceiling on wages taxed for Social Security purposes increased from $132,900 in 2019 to $137,700 in 2020. While this 3.6% increase will not make current high-income workers happy, the good news is that it will pump additional funding into the system to keep the program solvent longer.
Medicare. The Medicare Part B premium increase for 2020 averaged about 6.7% across all six tiers, substantially higher than last year’s increase. The new Tier 1 Part B premium, which most folks now pay, is $144.60 per month compared to $135.50 last year. The good news is that the smaller Part D surcharge for Tiers 2 through 6 (none in Tier 1) decreased by about 1.5%. Note that Medicare premiums and surcharges for 2020 are based on 2018 modified AGIs.
New for 2020 — income brackets used to define the six Medicare Part B premium and Part D surcharge tiers are now indexed to inflation. That’s good news for higher-income retirees who find themselves in one of the five higher tiers. This inflation adjustment may result in some folks shifting down one tier, resulting in lower premiums and surcharges.
As always, you are encouraged to consult with a professional tax preparer and your financial planner in order to take advantage of tax-planning opportunities.
James Terwilliger, CFP®, is senior vice president, senior planning adviser with CNB Wealth Management, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at firstname.lastname@example.org.