Tax Cuts and Jobs Act

How the TCJA Altered Taxpayer Brackets in 2020


The Tax Cuts and Jobs Act reduced the amount taxpayers owe from 2018 on. This is yet another change accountants need to be aware of, in addition to all the ones resulting from COVID-19. Expert Julian Block reviews the tax brackets and other helpful information you need to know.

Aug 20th 2020
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Late December of 2017 was when the Tax Cuts and Jobs Act (TCJA) went on the books. The TCJA provision most important to individuals:  a reduction of their taxes for 2018 and beyond.

The legislation left unchanged the number of tax brackets for individuals. For 2020, there continue to be seven graduated brackets. Those brackets still are “indexed,” meaning they’re adjusted annually.

The brackets begin at 10 percent on “taxable income”—what’s left after wages, pensions and other kinds of reportable income are offset by Schedule A write-offs for itemized deductions or standard deduction amounts for those who don’t itemize, along with all other allowable deductions, and before any credits are claimed.

The 10 percent bracket applies to taxable income of up to $9,875 for singles and $19,750 for married persons filing joint returns and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse dies). The brackets then ascend to 12, 22, 24, 32 and 35 percent, topping off at 37 percent.

The 12 percent bracket applies to taxable income between $9,876 and $40,125 for singles and between $19,751 and $80,250 for joint filers. The next bracket nearly doubles to 22 percent. It’s for income between $40,126 and $85,525 for singles and between $80,251 and $171,050 for joint filers.

Then comes the 24 percent bracket. It’s for income between $85,526 and $163,300 for singles and between $171,051 and $326,600 for joint filers. Next is a hefty increase to 32 percent, a bracket that applies to income between $163,301 and $207,350 for singles and between $326,601 and $414,700 for joint filers.

Close to the end of the rates is one for 35 percent that kicks in when income is between $207,351 and $518,400 for singles and between $414,701 and $622,050 for joint filers. The top rate of 37 percent  applies to singles with taxable incomes above $518,401 and joint filers with incomes above $622,051.

A myth that refuses to die. Surveys continually disclose that most Americans mistakenly believe that something like this happens to, say, Hilda, a filer who’s single and who is in a top bracket of 24 percent. The IRS siphons off 24 percent of the income that she reports on her 1040 form.

Actually, of course, the IRS taxes Hilda at that rate on only the part of her income that’s in her top bracket. What about the part of her income that falls into lower brackets? It’s taxed at those lower rates.

To illustrate, Hilda anticipates 2020’s taxable income will be $100,000, which the IRS taxes in exquisitely precise slices.* It calculates taxes on income in the brackets of 10 percent (the first $9,875 of her income), 12 percent (her income between $9,876 and $40,125), and 22 percent (income between $40,126 and $85,525) at those rates.

Finally, how much does a kinder and gentler IRS tax at a rate of 24 percent? Just $14,475 ($100,000 minus the $85,525 it already appropriated).

How does the IRS react when Hilda’s move to a higher-paying job causes her taxable income to exceed $163,300, the top number for the 24-percent rate? It requires her to move into the next bracket, where each added dollar of income is taxed at a 32-percent rate.

What’s the agency’s reaction when a Corona-caused salary decrease drops her income below $85,526, the bottom number for the 24-percent rate? Nyet problemy. It permits her descent to the 22-percent bracket.

State income taxes. Hilda needs to crunch more numbers when she’s liable for both federal and state income taxes. Is her combined top bracket simply the sum of her federal, state and city brackets? Nope. It’s her top federal bracket, plus the state and city brackets, minus the federal tax savings that becomes available because she can claim the local taxes as an itemized deduction on Schedule A of the 1040 form

But there can be complications. One is that those local levies might not be fully deductible on Schedule A, because there’s a cap of $10,000 on write-offs for state and local property taxes and income taxes. Another is that an adamant IRS insists that Hilda say sayonara to any write-offs if she decides it’s more advantageous to claim her standard deduction amount.

Medicare surtaxes. While the official rates top out at 37 percent for ordinary income from sources like salaries, the unofficial rates could go higher for filers whose top brackets are above 22 percent. They might be liable for Medicare surtaxes of 0.9 percent on earned income and 3.8 percent on investment income

Future columns. Dear Readers, I will devote several of them to tell you, as Garrison Keillor of A Prairie Home Companion would say, more than you ever wanted to know about the surtaxes.

*No less adept at precise slicing were the countermen (counterpersons, nowadays) at the delicatessens frequented by me when I was growing up on Chicago’s West Side. My recollection is that back then, during World War Two, 25 cents was all I had to part with to buy a corned beef sandwich on rye bread. The sandwich came with a pickle and coleslaw.

Several undeclared wars later and about 800 miles east of Chicago, $14 is what I now have to part with for an identical nosh at my neighborhood deli. French fries? Extra. A Dr. Pepper? Ditto. Face mask? No charge. Throw in sales tax, and we’re closing in on $20.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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