Current Individual Federal Income Tax Rate Scene

Here’s an overview of the current individual tax rates under the Tax Cuts and Jobs Act (TCJA). Many of its provisions that affect individuals will expire in 2026, unless Congress extends them.

Federal Income Tax Rates

The 2020 federal income tax rate picture for individuals is the same as last year, except the tax rate brackets have been adjusted slightly for inflation. Currently, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. For 2020, the top rate applies to:

• Single people with taxable income above $518,400,
• Married couples who file jointly with taxable income above $622,050, and
• Heads of households with taxable income above $518,400.

Long-Term Capital Gains Rates

For most individuals, the 2020 federal income tax rate on long-term capital gains and qualified dividends is either 0% or 15%. However, the maximum rate on long-term capital gains and dividends rises to 20% for:

• Single people with taxable income above $441,450,
• Married couples who file jointly with income above $496,600, and
• Heads of households with income above $469,050.

Net Investment Income Tax

Higher-income individuals can also see all or part of their net investment income, including long-term capital gains and dividends, hit with a 3.8% net investment income tax (NIIT). However, the NIIT strikes only if your modified adjusted gross income (MAGI) exceeds:

• $200,000 if you’re unmarried, or
• $250,000 if you’re married and file jointly.

The NIIT applies to the lesser of:

• Your net investment income, or
• The amount by which your MAGI exceeds the applicable threshold.

MAGI refers to adjusted gross income increased by certain tax-exempt income from outside the United States.

Additional Medicare Tax Rates

Higher-income individuals can also get hit by the additional 0.9% Medicare tax on wages and self-employment (SE) income. The 0.9% tax is charged on salary and/or net SE income above:

• $200,000 for unmarried individuals, and
• $250,000 for married couples who file jointly.

Expiring Tax Breaks

Be aware that these popular federal tax breaks for individuals are scheduled to expire at the end of 2020.

1. Higher education tuition and fees deduction. This write-off can range from $0 to $4,000, depending on your income. This deduction is “above-the-line,” meaning that you don’t need to itemize to benefit.

2. Tax-free treatment for forgiven principal residence mortgage debt. Forgiven debts generally count as taxable cancellation of debt (COD) income. However, a temporary exception applies to COD income from canceled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that’s canceled in 2020 is treated as a tax-free item.

3. Credit for energy-efficient home improvements. Homeowners can claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The $500 cap must be reduced by any credits claimed in earlier years.

Uncertain Future

President-elect Joe Biden has said he would like to repeal parts of the TCJA, including raising the top individual federal income tax rate on ordinary income and net short-term capital gains back to 39.6%. However, he’s promised to refrain from raising taxes for people who earn less than $400,000.

It’s important to remember that the president doesn’t make legislation. Any post-election federal tax law changes would first have to pass in the House and Senate, before going to the president to sign into law — or to veto.

If you would like help examining your current tax scenario, contact Kirsch CPA Group at 513.858.6040 today or click here to schedule a time to talk.