Tax-efficient wealth building helped by 2020 inflation bumps for investment, estate and other taxes
Inflation and housing adjustments help with taxes that Americans abroad face

Alternative Minimum Tax exemption amounts, Social Security wage base increase in 2020


Welcome to Part 7 of the ol' blog's 2020 series on tax inflation adjustments. 
We started on Nov. 6 with a look at next year's income tax brackets and rates.
Today we look at changes to the Alternative Minimum Tax (AMT)
and next year's Social Security wage base.
Note: The 2020 figures in this post apply to 2020 returns to be filed in 2021.
For comparison purposes, you'll also find 2019 amounts to be used
in filing 2019 returns due April 15, 2020.


ATM machine_getting cash
Thanks to tax reform's changes, the AMT is no longer an ATM for the tax collector.

The alternative minimum tax, usually referred to by its acronym AMT, was created in 1969 after it was revealed that a few rich taxpayers — and we're talking a really few, specifically only 155 people who back then made more than $200,000 — avoided paying any tax.

The AMT was designed to ensure those wealthy taxpayers paid at least some tax at one of the parallel tax's two rates, either 26 percent or 28 percent. Plus, they had to do double the filing work, computing their taxes under both the regular and alternative tax methods.

It worked. In fact, it worked too well.

The AMT soon became a collection mechanism for a lot of decidedly not super-rich taxpayers.

The reason? The threshold at which the tax was triggered in 1960 was not indexed for inflation, meaning its parallel tax system and rates tended to trap each year a new group of filers whose income had increased each year.

In the eyes of these unintended payers of more tax, the AMT effectively was an ATM for the Internal Revenue Service.

Rewriting AMT's rich history: Congress finally offered a work-around by annually raising the AMT exemption amount. This is income level you had to exceed before you had to worry about it.

Sometimes, though, lawmakers were slow to get to the increase. That problem was solved in 2013 when Capitol Hill finally made annual inflation modifications a permanent part of the AMT.

Then came December 2017 and the enactment of the Tax Cuts and Jobs Act (TCJA), aka tax reform.

This new law took a lot of the teeth out of the AMT by including an even higher AMT income exemption and an increase in the threshold at which that exemption phases out.

Tax reform's AMT relief: Plus, TCJA changes have removed the AMT for many filers.

Fewer folks are claiming some of the itemized deductions, like substantial state and local taxes (SALT), that used to trigger AMT calculations.

With SALT is capped on Schedule A to $10,000 instead of being unlimited, more folks are taking the standard deduction, which has been greatly increased. Even those filers who still itemize face a lower AMT threat because of the deduction cap.

Now, the AMT is working for the most part as intended. Most taxpayers who will face it are those who truly are rich.

One estimate has the number of taxpayers paying AMT dropping an estimated 200,000 each year through 2025, which is the final year of the TCJA individual provisions. In 2017, around 5 million filers paid the AMT.

Feeling better? Good.

But don't get too comfortable. Taxes and tax situations are nothing if not fluid.

And if you do somehow find yourself possibly looking at making both regular and AMT calculations, the annual inflation adjustments could offer another bit of possible relief.

Here's how those AMT amounts will look in 2020.

AMT's automatic inflation adjustment: The annual and automatic adjustment for inflation helped those middle-class families that found themselves falling into AMT clutches year after year.

And, as noted, the TCJA set that threshold to be adjusted even higher.

That means that for 2020, the AMT exemption amounts start at:

  • $72,900 for single and head of household taxpayers,
  • $113,400 for married couples filing joint returns or surviving spouses, and
  • $56,700 for married couples filing separately.

Next year's amounts are bump up from the 2019 AMT exemption amounts of:

  • $71,700 for single and head of household taxpayers,
  • $111,700 for married couples filing joint returns or surviving spouses, and
  • $55,850 for married couples filing separately.

The minimum tax also applies to young people subject to the kiddie tax, discussed in Part 6 of this inflation series.

For the 2020 tax year, a child to whom the kiddie tax applies has an AMT exemption that's the child's annual amount of earned income (that's wage or salary money, not the investment in come to which the kiddie tax applies) plus $7,900. That "plus" amount for 2019 is $7,750.

All these AMT exemptions for both years should save plenty of filers from the hassle of doing two separate tax computations.

Payroll taxable amount going up, too: As the AMT issue shows, earning more money does have some drawbacks. Still, I've never met anyone who's turned down a raise.

If you do get a bump in pay in 2020, there's another annual adjustment related to income and taxes that should help you escape certain taxes.

I'm talking about the amount of wages that are subject to the federal payroll tax, as well as the self-employment version that folks who are their own bosses make.

Every worker is painfully aware of these Federal Insurance Contributions Act, or FICA as it often appears on pay stubs, collections.

There's the 6.2 percent of earnings that workers pay via withholding taxes toward Social Security.

More earnings, more Social Security taxes: That 6.2 percent tax from your pay for Social Security is tied to the annual wage base.

Social-security-card-cash

Technically, this amount isn't indexed for inflation. Instead, each year the Social Security Administration (SSA) uses a specific formula to set the maximum taxable earnings level when a cost-of-living adjustment is effective so that Social Security benefits can keep pace with, you guessed it, inflation.

The SSA in October announced the 2020 wage base limit would be $137,700. That's a 1.6 percent increase over the 2019 wage base limit of $132,900.

That increase means that in 2020 if you earn at least the maximum wage base amount next year, you could pay a maximum Social Security tax of $8,537.40. That tax figure comes from 6.20 percent X $137,700.

Total from both sides: Also keep in mind that your employer is matching your FICA taxes.

Here's how that plays out year-round for you and your boss under the new 2020 numbers break down:

Worker maximum Social Security FICA earnings

=

$137,700

Maximum amount of payroll tax withheld from worker
(6.2% of $137,700) 

=

$8,537.40

Maximum amount matched by employer
(6.2% of $137,700)

=

$8,537.40

Maximum possible Social Security FICA tax in 2020
($8,537.40 employee + $8,537.40 employer)

=

$17,074.80

And for this 2019 tax year, the Social Security payroll tax maximum amounts are:

Worker maximum Social Security FICA earnings

=

$132,900

Maximum amount of payroll tax withheld from worker
(6.2% of $132,900) 

=

$8,239.80

Maximum amount matched by employer
(6.2% of $132,900)

=

$8,239.80

Maximum possible Social Security FICA tax in 2019
($8,239.80 employee + $8,239.80 employer)

=

$16,479.60

As far as your annual income's bottom line, the SSA bump of the wage base means you'll pay $297.60 more in FICA taxes if you make the maximum wage base amount during 2020.

If, however, you make $132,901 or more this year or $137,701 or more next year, your earnings in excess of the wage base amounts will not be subject to the Social Security payroll tax.

Keep these amounts in mind as you work on your speech to convince your boss to give you a nice holiday bonus this year or bump up next year's pay to (or more than) 2020's wage base amount.

No income tax cap on Medicare: Savvy workers might be questioning my math, saying more than 6.2 percent come out of their check every payroll period.

You're right.

FICA taxes total 15.3 percent of a worker's earnings. But that percentage is for Social Security and Medicare.

The Medicare portion, which goes toward the federal medical insurance program for eligible folks age 65 and older, is 1.45 percent of pay, again from both the employee and employer.

That portion of FICA isn't an issue when it comes to the annual wage base amount because there's no limit on wages that are subject to this combined 2.9 percent payroll tax.

So no matter how much more than $132,900 you make this year or the excess of $137,700 in 2020, the Medicare payroll tax will keep coming out of your pay and being matched by your boss.

And higher earners could pay even more into Medicare.

ACA add-on: The Affordable Care Act, aka the ACA or Obamacare, assesses a 0.9 percent additional Medicare tax on employees who, as single taxpayers, earn more than $200,000 or more than $250,000 if married filing jointly.

Those Medicare surtax earnings limits are not adjusted for inflation.

And the add-on tax is still in effect, despite desires by Republicans to end it. It's also not matched by employers, but is borne only by the well-paid affected workers.

The bottom line is that all of us pay FICA taxes on some of our income.

With the 2020 hike in the Social Security wage base, most of us pay FICA on all of our income since we don't make more than that six-figure amount to escape the Social Security portion of the tax.

And a few wealthier workers will pay more Medicare taxes on more of their income.

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