CLEVELAND, Ohio – This time of the year provides an opportunity for some people to essentially pick the top tax bracket that will be applied to their next return, translating to tax savings.
Let’s say you have two retirement accounts, a traditional IRA in which your withdrawals are taxable, and a ROTH IRA without taxes on your withdrawals. Knowing the new cutoffs for the tax brackets can be valuable in choosing which account to tap in December – and for how much – or whether to hold off until early January for an optional withdrawal.
Same goes for the timing on business expenses and collections.
The difference could be as much as 10 percentage points in federal tax rates. Here’s why.
As an example, an individual in the 22% tax bracket doesn’t pay 22% in taxes for all their income. This person pays 22% on just the portion of their income after deductions from $40,126 to $85,525 (the range is higher for couples). The rates are 12% and 10% on the portions of their income that fall in the lower brackets.
The right timing on accumulating income or deductions can help you avoid a higher bracket altogether.
2020 tax brackets for forms filed in 2021
Here are the 2020 tax brackets that will be on the IRS forms due in April 2021. Remember, these tax rates are for taxable incomes after deductions. Most people will first subtract from their income the standard deduction, which for single filers on the upcoming forms will be $12,400 (up $200). For couples, it will be $24,800 (up $400).
* 10% – The portion of income up to $9,875 (single), or $19,750 (married filing jointly).
* 12% – The portion of income from $9,876 to $40,125 (single); $19,751 to $80,250 (joint return).
* 22% – $40,126 to $85,525 (single); $80,251 to $171,050 (joint return).
* 24% – $85,526 to $163,300 (single); $171,051 to $326,600 (joint).
* 32% – $163,301 to $207,350 (single); $326,601 to $414,700 (join return).
* 35% – $207,351 to $518,400 (single); $414,701 to $622,050 (joint return).
* 37% – $518,401 and over (single); $622,051 and over (joint return).
This is one in a series of stories republishing during the holiday period on recent advice and tips from our cleveland.com/Plain Dealer personal finance column on cleveland.com. See previous columns at this link – That’s Rich!
Email questions and suggestions to rexner@cleveland.com. Include your hometown and first name for publication. And to help me sort through the clutter of my email box, try to remember including “That’s Rich!” in the subject of the email.
Previously
Paying your entire property tax bill in December can mean tax savings: That’s Rich! short
With mortgage rates nearing 2%, it’s time to test if a refinance is right: That’s Rich! short
Will the historic Santa Claus Rally repeat in 2020-21 with holiday stock gains? – That’s Rich! recap