We are all busy in February, but let's not forget the essential budget planning for 2020. At the start of each year, the key figures of many tax laws are adjusted for inflation. As the IRS and the Social Security Administration announce these numbers in the fall, January is the time to be careful. Many of the adjustments are beneficial for employees, wages, and essential tax planning for 2020.
Many sections of the tax code are changed, and it can be not very easy to find the ones that interest you. Some are only of interest to super-wealthy executives and others, such as the federal property tax exemption in 2020, $11.58 million for individual taxpayers and $23.16 million for married taxpayers.
Others are primarily problems for administrators of corporate pension plans. For example, the definition of "high-wage earners" income, which affects eligibility for employee share purchase plans (ESPP) and 401 (k), provides for non-discrimination plans, which are passed to $ 130,000 by 2020.
Here are the first three groups of tax codes that all employees should know. These are linked to labor compensation: withholding tax, the possible need for tax estimates, and retirement savings.
The social security rate (6.2%) applies to salaries up to a maximum annual amount fixed annually by the social security administration. Income above this limit is not subject to social security tax; on the contrary, the Medicare tax has no limits, at 1.45% or 2.35%, depending on the level of income. In 2020, the salary ceiling for social insurance is $ 137,700, or just over $ 132,900 in 2019. This means that the maximum possible retention of the INSS in 2020 is $ 8,537.40. When your income exceeds this amount, you will see 6.2% more in your salary.
This number indicates whether the taxes withheld on your information in the recently revised W-4 will cover the total tax paid by 2020. To avoid "penalizing" the extra income in mind, make sure you know your average or effective tax rate.
The additional remuneration received, such as a cash bonus or income resulting from the exercise of stock options without reserve or from the purchase of shares in limited shares, is considered as additional salary income. For federal sourced deductions, most companies do not use the W-4 rate. Instead, they apply a fixed IRS rate of 22% for additional income (the rate is 37% for additional annual income over $ 1 million).
After having known the marginal tax rate, the tax rate withheld of 22% may not cover all the taxes paid on the additional salary income. In this case, you need to allocate extra money for the tax return you submit in 2021, pay estimated taxes in 2020, or change your W-4 to maintain your wages as soon as possible to cover the deficit.
By 2020, you can choose to carry up to $19,500 of your salary into qualifying retirement plans, such as 401 (k). This is an increase of $ 500 from the 2019 limit.
The total limit on deferrals to defined contribution pension plans, including any additional portion offered by the employer, increased to $ 57,000 in 2020, an increase of $ 1,000. Both limits are higher by $ 6,500 if you are fifty years or older. The cost of compensation income that can be taken into account when calculating eligible deferrals is $ 285,000 in 2020. Consult your company's 401 (k) plan administrator to see how the deferral process changes compensation.
Find out if your business has an unreserved deferred compensation plan, sometimes called a 401 (k) surplus plan or something else.
Elliot Kravitz, ATP