Medical tax provisions affected in 2020 by inflation
Alternative Minimum Tax exemption amounts, Social Security wage base increase in 2020

Tax-efficient wealth building helped by 2020 inflation bumps for investment, estate and other taxes

Welcome to Part 6 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 how the annual changes
help investors their families and eventual heirs.
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.

OK, maybe the rich don't literally burn money. But as the saying goes, the very wealthy really are different from the rest of us, including how they make money and how that income is taxed … or not.

One of the truisms of personal finance is that you're better off when your money works for you instead of you working for your money.

That's usually accomplished by investing. And that old saw recognizes that not only do sound investments grow over the years, from a tax perspective that growth tends to cost you less.

This passive earnings situation got even better with the passage of the Tax Cuts and Jobs Act (TCJA), which increased the amount of investment profits that are taxed at lower capital gains rates.

And when that money finally meets the inevitability of death, the tax reform law dramatically increases the amount of assets that will be outside Uncle Sam's reach under the federal estate tax.

Lesser tax bite for capital gains: The hubby still has a stock that his grandmother gave him when he was in elementary school.

His sweet grandma was a conservative investor, so as you would expect, she gave her favorite grandson (OK, her only grandson) and his female siblings and cousins a pretty staid investment.

But he's held it so long that it's grown nicely. And when he does sell it, the shares definitely will qualify for the lowest long-term capital gains tax rate.

Long-term capital gains are one of two options. The other is, you guessed it, short-term capital gains.

Short-term gains are taken when you sell an asset owning it for a year or less. In these cases, the tax on the sale profit is the same as your ordinary income tax rate, which could be as high as 37 percent.

If, however, you hang onto the asset for more than a year before selling, your investment patience is rewarded with a generally lower long-term tax rate on any profits.

There are three long-term capital gains tax rates: 0 percent, 15 percent and 20 percent. Which one applies depends on your overall income and filing status.

The TCJA kept the three long-term capital gains tax rates. But changes to the ordinary tax rates, both the tax rates and income brackets to which they apply, disrupted the way capital gains were calculated under the prior tax law. So TCJA authors created specific long-term capital gains tax rates, which now also are adjusted for inflation.

The table below shows the income brackets to which the 2020 long-term capital gains taxes apply:

 Tax Year

Capital Gains Taxable Income Brackets by Filing Status

 Long-Term   Capital Gains
 Tax Rate


 Head of   Household

 Filing Jointly
 or Surviving

 Married Filing


 $0 to $40,000

 $0 to $53,600

 $0 to $80,000

 $0 to $40,000


 $40,001 to

 $53,601 to

 $80,001 to

 $40,001 to 


 & more

 & more

 & more

 & more

For comparison, below are the 2019 tax year long-term capital gains rates and income brackets:

 Tax Year

Capital Gains Taxable Income Brackets by Filing Status

 Long-Term   Capital Gains
 Tax Rate


 Head of   Household

 Filing Jointly

 Married Filing


 $0 to $39,375

 $0 to $52,750

 $0 to $78,750

 $0 to $39,375


 $39,376 to

 $52,751 to

 $78,751 to

 $39,376 to 


 & more

 & more

 & more

 & more

In addition to capital gains tax rates listed in the tables, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax.

And yes, there are other capital gains tax rates for other holdings, like collectibles, but they aren't affected by inflation.

Uncle Sam also collects capital gains taxes on estates and trusts. For 2020, the maximum zero rate applies to estates or trusts worth up to $2,650. The top earnings level for an estate or trust to be taxed at 15 percent is $13,150. The 20 percent rate applies to these entities worth $13,151 or more.

For estates and trusts in 2019, the maximum capital gains earnings are $2,650 for the zero rate; $12,950 for the 15 percent rate; and $12,951 or more is taxed at the top 20 percent capital gains tax rate.

Estate tax exclusion increase: Now about that estate tax. Uncle Sam has been collecting tax on what we leave behind for decades.

Yes, the estate tax died for the 2010 tax year. But Congress resurrected it the very next tax year.

And while anti-estate tax groups would have you think it applies to everything left by a decedent, there's also typically been a base exemption, also called an exclusion amount, that's untaxed at the federal level.

The federal estate tax exclusion amounts have over the years been adjusted for inflation. That's still true under the TCJA, which also dramatically upped that base amount in 2018. The annual inflation adjustments keep increasing the amount that we can leave when we leave this mortal coil and not have it face any federal estate tax.

For 2020, inflation bumps up the estate tax exclusion amount even more. A rich individual can leave heirs a tax-free estate of up to $11.58 million. The 2019 exemption was $11.4 million per person.

And note that per person phrase. That translates to an estate tax exemption amount of $23.16 million for a married couple next year, up from the $22.8 million joint exclusion for a wedded duo in 2019.

When an estate exceeds those tax year amounts, then and only then is the federal estate tax, which can go as high as 40 percent, assessed on the overage.

These multimillion-dollar exclusion amounts mean that the hubby and I and our families and our friends will likely never have to worry about the federal estate tax, unless we win the lottery or we get new, richer friends!

Note, though, that you might have to worry about the state tax collector. More than two dozen states and the District of Columbia do have either an have an estate or inheritance tax — our old Maryland stomping grounds has both — and their exclusion levels are much, much lower than the federal level.

Tax-free gifting, too: If, however, you have or expect to have much more money that could push your estate into Uncle Sam's hands once you're gone, you'll want to take some steps to lower that eventual tax bill.

One of the most common estate-planning tools is giving away some of your wealth while you're still around to get the thanks.

The annual exclusion for gifts is $15,000 per person for calendar year 2020, the same as it is for 2019.

Like the estate tax exemption, the $15,000 limit this and next year (and whatever amount it might be further down the line) is, as you probably noticed in the previous sentence, per person. That means if you're married, you and your spouse each can give $15,000 to the same person.

Pulling out my handy calculator, that also means that a married couple with three kids and five grandchildren can each give $30,000 in 2019 and again in 2020 to those eight family members for a combined gift total of $240,000 each year without facing gift tax consequences.

And despite my example, you (and your spouse) also can give these $15K gifts to folks beyond your immediate family. So if you have some spare cash and really enjoy the ol' blog, just let me know.

Also, the gifts are not limited to dollars. You can give assets valued up to the limit, such as gifts of real property and family heirlooms.

By bestowing your cash and property beforehand, you can reduce the amount of your assets left to be distributed after you're gone. This is a good way to dole out your estate the way you want and keep its value under the amount that will trigger the federal estate tax.

Even better, those gifts are not taxable to the recipient.

Best of all, as long as you follow the rules, the gifts you won't face any gift tax.

Adding up all those gifts: The major tax-related gifting rule is, of course, that you can't just give away all your riches to escape the tax collector. That's why the lifetime gift exemption, aka the unified credit against the estate tax, was created.

As the name indicates, the lifetime gift exemption is the total amount of gifts that can be given away tax-free by a person over his or her lifetime to any number of people.

It's easy to keep track of because it's the same as the annual estate tax exemption amount.

Again, that's $11.4 million per person ($22.8 million per jointly filing couple) in 2019 and, thanks to inflation, $11.58 million ($23.16 million for a married couple) next year.

This unified limit is necessary because without it, rich folks might be tempted to simply give away the bulk of their money or property while living to avoid estate taxes after death.

If you do go over the lifetime gift exclusion, you will owe a 40 percent tax on those excessive gifts.

Counting the kiddie tax: We all know how much it costs to have and raise a family. But the youngsters often play a role in family wealth building and preservation beyond the potential annual estate-planning gifts.

Children often receive monetary gifts from wealthy parents and grandparents. Such family financial gifts often are invested by the young recipient person, which is a good way to teach the child about making money work for them rather than just working for money.

Kids with money_Carissa Rogers via Flickr CC
Photo by Carissa Rogers via Flickr CC

However, all these family members need to be aware of potential tax costs here. Specifically, the young investors and their parents need to keep an eye on the annual amount of their unearned income.

When young people — up to age 23 if a full-time student or 18 if not going to college — have unearned income that exceed certain limits, the kiddie tax comes into play on those successful investments.

The kiddie tax first appeared in 1986 as a legislative way to close a tax loophole for the wealthy. After a certain earnings level, a child's investment income was taxed at the same rate as that of their parents. By effectively raising the potential tax on the youngsters' passive income, the idea was that well-to-do adults wouldn't be so inclined to shift their wealth by putting it in their lower-taxed children's names.

The TCJA changed that a bit. Now instead of the parents' tax rate, the kiddie tax requires the excess unearned income to be taxed the rates that apply to trusts and estates.

That's not a welcome change, since the estate and trust rates are effectively higher than individual rates, meaning that the children's unearned income will be taxed at higher rates than their parents' income. More on estate and trusts taxes in the next section.

So what's the earnings amount that triggers the kiddie tax?

For 2020, a young investor's first $1,100 of unearned income is not taxable. That's the same as the 2019 limit. Then the next $1,100 in unearned income for both 2019 and 2020 is taxed at the child's tax rate, typically the lowest 10 percent rate.

Only when a child's investment earnings top the combined limit — in 2019 and 2020 that's $2,200 (the untaxed $1,100 and the next $1,100 taxed at the child's rate) — is the young financier's excess unearned income taxed at the rates that apply to trusts and estates.

Or parents can opt to include a child's gross income in the adults' gross income and calculate the kiddie tax there. One of the requirements for this parental election is that a child's gross income for 2019 and 2020 must be more than $1,100 but less than $11,000.

Estate and trust tax rates: Wait. There's an estate tax and estate and trust taxes, too?

Yes. Earnings from trusts and estates have their own tax rate schedule for income that trustees choose to retain rather than distribute to beneficiaries.

Under this system, higher rates kick in at lower income levels than the tax rates and income brackets for individual taxpayers. The design intentional to keep trusts from being used as tax shelters.

However, the TCJA lowered tax rates for trusts and estates, just like it did for individuals, at least through 2025. It also reduced the number of trust and estate tax brackets from five to four.

The estate and trust tax rates for 2019 and 2020 are shown in the table below.

Trusts and Estates Tax Rates & Income Brackets





 $0 to $2,600

 $0 to $2,600


 $2,601 to $9,300

 $2,601 to $9,450


 $9,301 to $12,750

 $9,451 to $12,950


 $12,751 and more

 $12,951 and more

Get tax help, more inflation updates: Obviously, when you're talking inter-generational income and how to make, preserve, distribute and pay taxes on it, things, like families, can get very complicated very quickly.

I guess being wealthy is not as easy as it looks. But I'd certainly be willing to give it a try.

If you are at a higher income level and need to consider any of these family wealth and investment issues, remember that this post and inflation amounts are just informational. Before you go trying to set up a tax-wise estate plan, your best first move is to hire a good financial and tax adviser.

However, you can still come back here tomorrow as the ol' blog's 10-part 2020 inflation series continues. You can check out the five inflation items before this and get a preview of what's to come the rest of this week at the end of Part 1.





Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.