This January starts a new year and a new decade. It also means tax season is quickly approaching and it will soon be time to file for 2019. While taxes are already on the brain, it’s a good time to think ahead and make sure you are making informed decisions for your individual tax situation.
In November 2019, the IRS released 2020 updates to the tax code, which included new tax bracket ranges adjusted for inflation. The following chart outlines the new brackets:
Will these new ranges affect your 2020 taxes?
Well, that depends. First, it’s important to understand that taxes can be more complicated than they seem. For example, an individual with income falling within the 22 percent tax bracket will not simply be taxed at 22 percent. Only taxable income that falls within that range will be taxed at that rate. After deductions (whether standard or itemized) and other applicable adjustments take effect, remaining income is taxed at a progressive rate. So, an individual with $45,000 of taxable income would be taxed at 10 percent on income up to $9,875, 12 percent on income from 9,876 to $40,125, and 22 percent on the remaining income of $4,875.
Taxes are also based on a marginal and an effective tax rate. In the example above, the marginal tax rate (or highest tax rate paid) is 22 percent. However, the effective tax rate is based on the average tax paid, which would be closer to 12.7 percent.
Using the new tax brackets as a guideline can help you determine where you fall in marginal and effective tax rates. This will help you decide if you need to adjust withholdings, contribute to an IRA, increase charitable contributions, or take other steps to maximize deductions.
The tax professionals at Rodefer Moss can help with all your tax needs. Call today for 2019 tax returns or to develop a tax strategy for 2020.