Every year, the IRS adjusts tax rates and taxable amounts to account for inflation and changing economic times. 2020 has been a tough year for businesses and employees because of the COVID-19 pandemic. Due to a slowdown in economic activity, business earnings and individual incomes have reduced significantly.
As a result, the IRS has had to adjust tax laws to help people and businesses cope with the tough times.
Last December, Congress passed laws that gave tax breaks to Americans that have been victims of floods, wildfires, and hurricanes. These Americans can benefit from employer credits.
In the wake of the COVID-19 pandemic, congress passed the Coronavirus Aid, Relief, and Economic Security Act. This law allows the IRS to refund payroll taxes to businesses that have experienced a slowdown in business activity. The law is supposed to entice companies to retain their employees.
The Mortgage Debt Relief Act was extended to 2020. According to this law, the IRS cannot tax mortgage debt canceled by the bank due to foreclosure or restructuring. The law covers debt up to a value of $2 million. It’s also applicable in the purchase of principal residence; the mortgage must be for a house that you were intending to live in. If you borrowed the money for minor renovations, the canceled debt is also forgiven under this law.
Income Tax Changes
Although the income tax rate for high-income individuals hasn’t changed in 2020, the amount has been adjusted. If you earn above $518,400 annually, the tax rate is 37%. Before, the cap amount was over $510,300. If you file your taxes jointly as a married couple, the threshold has been increased from $612,350 to $622,050.
The tax rate for the lowest income earners remains at 10%. However, the individual taxable income amount has been increased from $9,700 to $9,875. If you file the tax income jointly as a married couple, the 10% tax rate applies to income that doesn’t exceed $19,750.
If you’re filing as the head of household, the amount of tax you’re going to pay is slightly less. As a head of household, you’re in charge of most of the expenses, and the IRS knows that. If you meet all the requirements to file as the head of the household, the 10% income tax rate only applies if your annual income is $14,100. For the 37% tax rate, your annual income has to be more than $518,400.
Capital Gains Tax
The capital gains tax rate for 2020 has been slightly adjusted. There are two types of capital gains: long-term and short-term. You pay long-term capital gains tax after holding onto an asset for more than a year and then selling it for a profit. For 2020, the long-term capital gains taxable amount has been increased from $39,375 to $40,000. As it currently stands, you’ll pay 0% capital gains tax on any amount above $40,000.
You pay short-term capital gains tax after holding onto an asset for less than a year and then selling it for a profit. The IRS taxes short-term capital gains the same as income. That means you can pay up to 37% tax on capital gains. Any gains up to $9,875 are taxable at a 10% rate.
Health Insurance Penalties
Last year, Congress passed a law to exempt people without health insurance from paying tax penalties. The law is still in effect in 2020. Before that law was passed, you were liable to a penalty of 2.5% of your taxable income.
The amount that a person can contribute to their individual retirement account or IRA is limitless. In the past, there was a limitation on IRA contributions. You could contribute as much as you want up to the age of 71. Beyond that, you were not allowed to add anything to that account. But things have changed in 2020. For the first time, there are no age limits for IRA contributions.