It’s always a bummer when the IRS releases the new tax brackets for the next year. Most of my clients will ignore the new tax brackets until, well, tax season. To get a jump and to figure out some tax planning for next year let’s see how they’ll affect you, your family, and your business.
By understanding where you fall in the brackets can help you plan how you want to contribute to your retirement, how to take deductions that reduce your liabilities so you can fall into a lower tax bracket. If you’re unsure what deductions, you can use you can check out the Big Fat List of Tax Deductions or one of the end of year tax strategies to save you some additional money you can check those out here and here.
You must use these tips before the end of the year so let’s get started right away to ensure you don’t pay next year.
There are only two certainties in life: Death and taxes ~ Benjamin Franklin
Free Ebook: Grab the Big Fat List of Small Business Deductions: Save money throughout the year with the Big Fat List of small business tax deductions. Use it as a reference all year round to save big at tax time.
Understanding 2020 Tax Brackets
First let’s explain that the money you earn is not taxed in whole according to the tax brackets. For example, if you earn $70,000 in 2020, all your income will be taxed at 22%.
That is not true. In the US we have what is known as a progressive tax system, meaning that only the income that falls within a tax brackets range is taxed at that rate.
For example, let’s say you’ve earned $70,000 took 15,000 in tax deductions then your taxable income is $55,000.
So, to follow the tax bracket on the taxable income goes as follows if you’re a single filer
|
Single Filers |
||
|
Income |
Tax Bracket |
Taxable Amount |
|
The first 9,875 |
10% |
$987.50 |
|
The Next $30,250 |
12% |
$3,630.00 |
|
The remaining $14,875 |
22% |
$3,272,50 |
|
 |
|
 |
|
Total Tax Liability |
|
$7,890.00 |
Confusing right?Â
I’m not saying you should necessarily figure out these numbers. But it helps to understand what your marginal and effective tax rate is to determine planning and reducing tax liability. A little planning on your part can help you save money on taxes.Â
Marginal and Effective Tax Rate
If you’re using a CPA or an accountant, they should be able to tell you your Marginal tax rate and your effective tax rate. But if you’re doing your taxes solo you might have to figure it out yourself.
The marginal tax rate is the highest tax rate that you paid. In the example above your marginal tax rate would be 22%. If this confuses you just think of it this way. Your marginal tax rate is the tax rate you paid on the LAST dollar you earned.
Your effective tax rate is the average tax that you paid overall. If you add up all your taxes and the percentage, you would be paying an effective tax of $14.3%.
I always recommend that you understand your marginal and effective tax rate for your current year so you can do a little planning.
There is a large jump between the 22% tax bracket and the 12% tax bracket yes there is only a dollar difference between them. If you’re borderline. Let’s say you’re at about 45,000 of taxable and you want to lower your income to be in the 12%. And you haven’t set any money aside for retirement it might be helpful to plan to contribute to your 401k, or an IRA to reduce your tax liability to 12%.
Or if you’re already in the 12% tax bracket you might want to contribute some of your retirement to a ROTH IRA instead of a 401K because you’ll pay fewer taxes when you retire.
Another way understanding can help us to update your W4 based on next year. Let’s say you know you’re going to be in the 37% tax bracket you could start by increasing your contributions to your retirement. If you’re already at the maximum it might be time to start planning what deductions may apply to you and how you can take advantage of them for 2020 to reduce them.
Tax Brackets for 2020
|
Single Filers |
||
|
Tax Bracket |
Minimum |
Maximum |
|
10% |
0 |
9,875 |
|
12% |
9,876 |
40,125 |
|
22% |
40,126 |
85,525 |
|
24$ |
85,526 |
$163,300 |
|
32% |
$163,303 |
$207,350 |
|
35% |
$207,351 |
$518,400 |
|
37$ |
518,400 |
|
|
Married, filing jointly |
||
|
Tax Bracket |
Minimum |
Maximum |
|
10% |
0 |
$19,750 |
|
12% |
$19,751 |
$80,250 |
|
22% |
$80,251 |
$171,050 |
|
24$ |
$171,051 |
$326,600 |
|
32% |
$326,601 |
$414,700 |
|
35% |
$414,701 |
622,050 |
|
37$ |
$622,050 |
|
|
Married, filing jointly |
||
|
Tax Bracket |
Minimum |
Maximum |
|
10% |
0 |
$19,750 |
|
12% |
$19,751 |
$80,250 |
|
22% |
$80,251 |
$171,050 |
|
24$ |
$171,051 |
$326,600 |
|
32% |
$326,601 |
$414,700 |
|
35% |
$414,701 |
622,050 |
|
37$ |
$622,050 |
|
|
Married, Filing Separately |
||
|
Tax Bracket |
Minimum |
Maximum |
|
10% |
0 |
$9,875 |
|
12% |
$9,876 |
$40,125 |
|
22% |
$40,126 |
$85,525 |
|
24$ |
$85,526 |
$163,300 |
|
32% |
$163,303 |
$207,350 |
|
35% |
$207,351 |
$311,025 |
|
37$ |
$311,025 |
|
|
Head of Household |
||
|
Tax Bracket |
Minimum |
Maximum |
|
10% |
0 |
$14,100 |
|
12% |
$14,101 |
$53,700 |
|
22% |
$53,701 |
$85,500 |
|
24$ |
$85,501 |
$163,300 |
|
32% |
$163,303 |
$207,350 |
|
35% |
$207,351 |
$518,400 |
|
37$ |
$518,400 |
|
Free Ebook: Grab the Big Fat List of Small Business Deductions: Save money throughout the year with the Big Fat List of small business tax deductions. Use it as a reference all year round to save big at tax time.
Putting it All Together
Understanding the tax brackets for 2020 helps you make better decisions when it comes to your money. Figure out and understand your marginal and effective tax rate to find planning strategies that reduce your tax liabilities.
Use extra savings on taxes to make contributions to your retirement which will, in turn, reduce your taxes.
If you need a little help and are unsure of what will help you we’ll be happy to review your last tax return for free to help you find additional savings and deductions. You can schedule an appointment here
If you need some help making some tax plans. Make an appointment today!
Happy Holidays!
Andrea