Welcome to Part 4 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 tax credit, deduction and income exclusion amounts.
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.
The hubby has a chant he breaks into every year when I start working on our annual tax return: "Deduct! Deduct! Deduct!"
It's sort of the tax version of yelling "USA" at sporting events.
Deductions can be a good way to cut your tax bill. They reduce the amount of taxable income you have, which in many instances lowers what you eventually owe.
There several deductions, including the standard or itemized methods discussed in Part 2 of this year's inflation adjustments series.
There also are the above-the-line deductions. These technically are income adjustments that work like deductions, hence the popular name, and can be claimed by every eligible taxpayer regardless of whether they itemize or use the standard amount.
These used to be listed directly on tax return Forms 1040 and 1040A. Now, under the Tax Cuts and Jobs Act (TCJA) changes, there's only one Form 1040 and these income adjustments are found on Schedule 1.
Deductions lower your taxable income, but that's not the only way to accomplish that goal. In some cases, money you receive is, by law, excluded from your income, meaning the tax man can't touch it.
And, of course, there's the even better tax-cutting option of claiming tax credits. Credits are dollar-for-dollar reductions of any tax you owe. In a few instances, credits can even get you a refund.
Many of these deductions, exclusions and credits are adjusted each year due to inflation.
Below is a look at some of these popular tax breaks and how much they'll be worth in 2020 thanks to the Internal Revenue Service's annual inflation adjustments.
Student loan interest: Paying for education is a major child-rearing expense. That's why so many students and/or their families take out loans to pay for college.
You can offset a portion of that educational debt by using the Schedule 1 write-off for student loan interest. This $2,500 tax break is set by law, so it doesn't change each year based on inflation.
However, the ability to claim this above-the-line deduction is based on your income and those earnings thresholds can be affected by inflation.
In 2020, you can claim the full $2,500 student loan interest deduction as long as you, as a single taxpayer, your modified adjusted gross income (MAGI*) is $70,000 or less. The cut-off for married filing joint returns taxpayers will be $140,000 next year. If you make more than these amounts for your filing status, the loan deduction amount is reduced.
*Shameless plug for the ol' blog's glossary, which explains MAGI as well as many other tax term definitions.
The loan interest deduction is eliminated if your MAGI as a single taxpayer is $85,000 or more or $170,000+ for married joint filers.
Those 2020 amounts are the same as the 2019 amounts.
Savings Bond exclusion for higher education: Savings bonds are another way to help pay for some higher education costs.
Interest earned on eligible Series EE and I bonds issued after 1989 is not taxed as long as the bond owner uses the redeemed bonds to pay qualified higher education expenses at an eligible institution.
In addition to meeting certain requirements, there's also an income limit for the education-related savings bond interest exclusion.
This exclusion will start phasing out in 2020 for those with MAGI of more than $ 123,550 on joint returns and $82,350 for all other filers. The tax-free savings bond interest exclusion is completely phased out for joint filers with MAGI of $153,550 and $97,350 or more for all other returns.
That's a hike over 2019's savings bond exclusion phaseout/elimination of more than $121,600 for joint filers and $81,100 for other taxpayers. This current tax year, you cannot claim the savings bond interest exclusion for educational use at all if your MAGI as a joint filer is $151,600 or more or is $96,100 or more if you file using one of the other filing statuses.
Educators' expenses deduction: Tax breaks are for more than just students. Elementary and secondary school teachers, along with certain other educators, can claim some of their out-of-pocket classroom expenses as an above-the-line deduction.
This $250 tax break was made a permanent part of the tax code as part of 2015 tax extenders bill (formally known as the Protecting Americans from Tax Hikes or PATH Act). PATH also initiated inflation tweaks to this amount.
Sorry, but inflation adjustments won't help here in 2020. It will stay at the same 2019 tax year level of $250. In fact, modest inflation has kept this above-the-line tax break at the same low-dollar level since 2017, even though studies show that the amount is not nearly enough to cover teachers' out-of-pocket classroom costs.
Tax reform good and bad: The TJCA was the first major tax reform bill since the 1986 Tax Reform Act. And as we learned from that historic bill more than three decades ago, some taxpayers win and some taxpayers lose.
Tomes have been written on the many TJCA changes, good and bad (depending on your tax perspective). I've done my share of posts on the topic.
But as with the prior tax law, some TCJA provisions, including one for a new deduction and another in connection with an income exclusion, also are affected by annual inflation adjustments.
Small businesses pass-through break: The TCJA primarily was a tax bill for big business, lowering corporations' top tax rate from 35 percent to 21 percent. But Congress realized it wasn't a good political move to hand out benefits to big business and ignore individuals and smaller companies.
So, as we learned this filing season, lawmakers tossed in a lot of individual tax provisions, both new and revised, and added a new tax break for certain small businesses, the Section 199A tax deduction.
The 199A provision offers qualifying pass-through entities a tax break in line with the TCJA's corporate tax cut. It allows eligible businesses — limits apply based on income and type of business — to deduct up to 20 percent of qualified business income, or QBI.
In 2020, the QBI threshold will increase to $326,600 for married couples filing joint returns and to $163,300 for married individuals filing separate returns, single taxpayers and heads of households who operate pass-through businesses.
In 2019, those thresholds are $321,400 for married joint filers and $160,725 for small business pass-through entity taxpayers using the other filing statuses.
Transportation fringe benefits: Commuting can tax your patience. A few years ago, some companies offset this stress by offering their workers' a tax-free fringe benefit that covered some getting-to-and-from-work travels (and travails.)
No more. Through 2025 under the TCJA, employers no longer can deduct fringe benefits offered commuting employees by subsidizing some or all of their parking, transit, and van pooling costs. The new law also suspends bicycle commuting reimbursement from the definition of qualified transportation fringe benefits.
Maybe you should find out if your workplace-provided health care benefit pays for yoga classes, since you're no longer going to get any transportation tax help.
Or maybe you should look for a job where the company will continue to provide this workplace perk as an employee recruiting or retention tool and absorb the tax costs.
Workplaces that continue to offer worker transportation benefits in 2020 can provide up to $270 a month to employees to cover their commuter highway vehicle travel, any transit pass or qualified parking. That's up just a tad from the $265 a month allowed in 2019.
Tax credits comparably better breaks: As noted earlier in this post, tax credits are a better tax reduction tool because they directly affect your bill. Once you figure what you owe Uncle Sam, you can use a credit to cut that amount.
Nonrefundable credits will reduce your tax bill down to nothing.
Refundable credits will zero out what you owe and give you any excess credit back as a tax refund.
Here are some popular tax credits that are affected by inflation changes.
Adoption tax credit, employer assistance: It's no secret, even to those of us without children, that kiddos cost a lot. There are myriad tax breaks to help moms and dads deal with child-related expenses, including help in the form a tax credit and tax-free employer assistance for folks who grow their families through adoption.
In 2020, a company can provide eligible adoptive parents up to $14,300 in in tax-free help to cover associated costs. That new income exclusion amount is up a few bucks from the $14,080 allowed in 2019.
Even if adoptive parents don't get help from their employers in 2020, they can claim next year an adoption credit of up to that same maximum $14,300 amount. Again, this is an increase from the 2019 amount of $14,080.
Both the adoption income exclusion and tax credit amounts will begin to phase out in 2020 when individuals have MAGI greater than $214,520. Once the adoptive parents hit MAGI next year of $254,520, they cannot claim the tax-favored adoption assistance.
The 2020 hikes are up from 2019's income phaseouts, which start at MAGI of $211,160 and end when adoptive parents' modified income is $251,160 or more.
Depending on the adoption's cost, you may be able to claim both the tax credit and the exclusion. However, you can't double dip; that is, you cannot claim both a credit and exclusion for the same adoption expenses.
Note, too, that the tax credit is not refundable. Any extra adoption credit after you reduce your tax bill to zero won't come back to you as a refund.
Child tax credit: Regardless of how your family grows, you can claim this tax break for qualifying children.
The TCJA enhanced this tax break, which has been around in some form since 1997, doubling the credit to $2,000 per eligible child.
It also makes a portion of the credit refundable.
For the 2020 tax years, up to $1,400 may be returned to parents as a refund. That's the same as the 2019 refundable portion of the child tax credit.
Lifetime Learning Credit: This Lifetime Learning Credit is another nonrefundable credit, but it's still worthwhile since it can help pay not only higher education costs, but also continuing education courses once you're out of school, such as a class you took to improve your workplace skills.
This educational tax credit is worth a possible maximum of $2,000. However, that amount is reduced if you make what the IRS considers a lot of money.
For the 2020 tax year, a single filer earning $59,000 or more will see a reduction in the Lifetime Learning tax breaks. That's doubled — $118,000 if you're as bad at doing math in your head as I am — if you're married and file a joint tax return.
In either situation, hit the MAGI number and you'll lose part of the Lifetime Learning Credit.
That's $1,000 more next year than the 2019 tax year's $58,000 MAGI limit for single filers and $2,000 than the $116,000 for married filing jointly taxpayers.
Retirement Saver's Credit: It's tough sometimes to save for retirement when you've got lots of other day-to-day expenses to meet. Uncle Sam wants to help encourage you to stash at least a little for your golden years via this special tax credit.
The Saver's Credit was noted in Part 3 of the 2020 inflation series, yesterday's look at next year's retirement plan tax inflation adjustments.
But since it's often overlooked, it deserves another mention here.
You can claim the Saver's Credit based on the money you put into IRAs and workplace (both as an employee or as the self-employed boss) plans. However, it's limited to folks who meet the annual earning requirements.
In 2020, the Saver's Credit maximum earnings caps go to:
- $65,000 for married couples filing jointly, up from 2019's limit of $64,000;
- $48,750 for heads of household, up from $48,000 for 2019; and
- $32,500 for singles and married filing separately filers, up from $32,000 in 2019.
You can see exactly how the Saver's Credit is phased out in the table in the Part 3 inflation series post.
Earned Income Tax Credit, or EITC: The Earned Income Tax Credit (EITC), which was created in the 1970s as an outgrowth of President Lyndon B. Johnson's War on Poverty, is a major tax break for middle- and lower-income workers. It is not changed under the new tax laws.
For the 2020 tax year, the maximum credit amounts, determined by your family size, are:
- $6,660 for taxpayers filing jointly who have three or more qualifying children,
- $5,920 with two qualifying children,
- $3,584 with one qualifying child and
- $538 if you don't have any qualifying children.
Even better, these amounts are refundable, meaning any credit amount that is more than your tax bill comes back to you as, per its name, an IRS refund.
For comparison purposes, the 2019 tax year refundable maximum EITC amounts are:
- $6,557 for taxpayers filing jointly who have three or more qualifying children,
- $5,828 with two qualifying children,
- $3,526 with one qualifying child and
- $529 if you don't have any qualifying children.
Of course, the key to claiming the EITC is to fall within the tax credit's earnings' guidelines.
If you don't make enough you can't claim it. Make more, and the credit amount is reduced. And if you make what is deemed too much, you can't claim the EITC at all.
For the 2020 tax year, inflation adjustments mean that your earned and adjusted gross income (AGI) each must be less than the following amounts in order to claim any EITC amount:
3 or More Children
For comparison, the 2019 tax year earnings limits are:
3 or More Children
In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. For 2020, that amount is $3,650. That's $50 more than the 2019 investment income limit.
More inflation figures: Whoa! That's a big bite of tax inflation numbers, both for this tax year and adjusted for inflation in 2020, even when parceled out in just this one item in the ol' blog's 10-part inflation series.
Not all of these deductions and credits will apply to every taxpayer. But the ones that do fit your tax circumstances are worth checking out as potential ways to cut your tax bill, both for this and next tax year.
And as noted in the intro to this post, more inflation changes are on the way.
You can get a preview of what's ahead — as well as what's been posted so far — in the index that's at the end of Part 1 of the 2020 tax inflation series, a look next year's tax rates and income brackets.
Finally, since this post is on Saturday, I'm awarding all the inflation adjustment posts, both those published and those to come in the next six days, this weekend's Saturday Shout Out.