The IRS announced the annual inflation increases for various tax provisions as of January 1, 2020.
The lifetime estate and gift tax exemption is increased to $11.58 million (from $11.4 million). A couple can jointly exempt $23.16 million from estate and gift taxes. The annual gift tax exclusion remains $15,000 for 2020.
The standard deduction for married couples filing jointly is $24,800 (up from $24,400). For single taxpayers, it is $12,400 (up from $12,200). Remember, the personal and dependent exemptions were eliminated for years after 2017.The top tax rate of 37% for married couples filing jointly begins when taxable income exceeds $622,050 ($518,400 for singles).
The 24% bracket begins with taxable income of $171,050 for married couples ($85,525 for singles). The 22% tax rate begins with taxable income of $80,250 for couples ($40,125 for singles).
The annual tax-deferred contribution to 401(k) and similar plans is increased to $19,500 from $19,000. The catch-up contribution for those ages 50 and older increases to $6,500 from $6,000. Total contributions to 401(k) plans are limited to $57,000 (from $56,000 in 2019).
The IRA contribution limit remains at $6,000. The contribution limit is the same for traditional and Roth IRAs. If you contribute to both types of IRAs, the aggregate contributions can’t exceed $6,000. The additional catch-up contribution for those age 50 or older for IRAs remains at $1,000.
The IRS also issued final regulations clarifying that taxpayers won’t be hurt if they make gifts now and the lifetime estate and gift tax exemption is later reduced. This is known as the anti-clawback rule. You’re aware that the Tax Cuts and Jobs Act doubled the lifetime estate and gift tax exemption, but that amount is scheduled to be reduced beginning in 2026.
Also, some in Congress propose reducing the exemption sooner. Estate planners have worried what would happen if, for example, a person makes lifetime gifts up to today’s current exemption amount and then passes away when the lifetime exemption is lower.
The new regulations say in that case the IRS won’t tax gifts that were exempt when made but exceed the lower exemption amount in effect when the person passes away. The exemption amount that existed in the year the gifts were made would be applied to the gifts. But the exemption amount that is effective in the year of death would be applied to the estate.
Also, when a spouse passes away without using all of his or her lifetime exemption amount and the estate elects to transfer the unused exemption to the surviving spouse, the unused exemption amount is not reduced if the lifetime exemption amount is reduced in a later year.
These regulations encourage people with substantial estates to give away property up to the current exemption amount before 2026, or earlier if it looks like Congress will reduce the exemption.