Category: Blog

Understanding Four Types of Depreciation

4 min read

Four Types of DepreciationDepreciation is an accounting process where the cost of an asset is accounted for and expensed over its useful life. It shows how the value of the asset decreases over time. Assets that can be depreciated include buildings, fixtures, production equipment, etc. For intangible assets, including many types of intellectual property, this process is called amortization. For commodities mined or harvested from the earth, such as lumber, crude oil or natural gas, this process is called depletion. Here are four common types of depreciation.

Straight Line Method

In order to determine depreciation using this method, the following formula is used:

Depreciation = (Asset cost – Salvage value) / Useful life

The salvage value is the asset’s remaining value after its useful life, and the remaining amount from the asset’s cost is depreciable. The depreciable amount is divided by the asset’s useful life that’s used for depreciation expensing.

Double Declining Balance Depreciation

In order to calculate this method of depreciation, the first step is to look at the asset cost. From there, its useful life must be established. Let’s assume an asset’s book value is $75,000, it has a useful life of 10 years and a salvage value of $8,050.

Depreciation = (100 percent / asset’s useful life) X 2

= (100 percent / 10) X 2 = 20 percent

Year 1 depreciation expense = $75,000 X 20 percent = $15,000

Year 2 depreciation expense = $60,000 ($75,000 – $15,000 from Year 1) X 20 percent = $12,000

When beginning the first year, the book value is used as a basis for the asset’s value. The ending book value, which is determined after subtracting depreciation, is the following year’s new book value that will be used to establish next year’s depreciation expense. After it’s repeated through its useful life, the salvage value is left.     

Units of Production Depreciation Method

This type of depreciation method depreciates a business’ asset by the units it produces or how many hours the asset is to be run for production over its useful life.

Depreciation = (Number of items manufactured / useful life in measured units) X (asset cost – salvage value)

Let’s assume a supplement pill machine costs $50,000; it can produce 200 million vitamins over its lifetime; and it will have a salvage value of $2,500. This assumes it will produce 20 million vitamins in the first 12 months of operation.  

(20 million / 200 million) = 10 percent X ($50,000 – $2,500) = $47,500

If the machine produces 10 percent of vitamins over its expected 200 million vitamin unit life, the resulting depreciation amount is $4,750. At the end of the first year the book value will be $45,250. Production amounts in future years will dictate how much may be depreciated.

Sum of the Years Digits Approach

Similar to other methods of depreciation, the Sum of the Years Digits (SYD) depreciation method is another type of depreciation that assigns the bulk of depreciation in the beginning years of an asset’s useful life. Looking at the formula is the best way to understand how it works.

Expensing Depreciation = (Asset’s remaining life / Sum of the years digits) X (Asset’s cost – salvage value)  

If a machine that’s going to be used by a company to produce widgets costs $50,000, has a useful life of 16 years and a salvage value of $3,000, it would look as follows:

1. $50,000 – $3,000 = $47,000 Depreciation Base

2. With 16 years of useful life for the asset, the sum of the years would be: 1 + 2 + 3 + 4 + 5 +6 + 7 + 8 + 9 + 10 + 11 + 12 + 13 + 14 + 15 + 16 = 136. Using the machine referenced above during the first year would equal a Remaining Life of 16. Then, the Remaining Life of 16 years would be divided by the SYD of 136.

3. Using this example, for the first year of using the machine, the formula would be as follows:

16 years (remaining life) / 136 (SYD) = 0.11764. Then, 0.11764 X $47,000 (Depreciation Base) = $5,529.08

The next (or second) year’s depreciation expense would by 15 / 136 = 0.110294. Then, 0.110294 X $47,000 = $5,183.82

Each subsequent year the SYD would be divided by the remaining years until it’s exhausted and the salvage value should be met.

Depending on the type of business, the type of asset and the accounting approach, there are different ways to expense for property acquired during the course of business.

Blocking Robocalls, Stepping Up Suicide Prevention for Vets, and Appropriating Funds for a New Space Force

3 min read

S 151, S 737, HR 2333, HR 1865, S 1790, HR 5363Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (S 151) – Approximately 58.5 billion robocalls were made in the United States last year, a 22 percent increase over 2018. That works out to an average of 178.3 robocalls per person, per year. Perhaps it’s no wonder then that this law was passed by an overwhelming bipartisan majority in Congress. The legislation requires that phone companies ensure all calls come from real numbers, do not charge extra to block robocalls, and authorize government regulators to punish scammers with fines of up to $10,000 per call. This legislation was sponsored by Sen. John Thune (R-SD) and Frank Pallone Jr (D-NJ); it was signed into law by the president on Dec. 30, 2019.

Building Blocks of STEM Act (S 737) – This bill modifies National Science Foundation (NSF) grant programs that support STEM education (science, technology, engineering and mathematics) to promote the role of teachers and caregivers in encouraging participation by female students in STEM activities. Specifically, the bill authorizes the development of gender-inclusive computer science enrichment programs in pre-kindergarten through elementary school. The legislation was sponsored by Sen. Jacky Rosen (D-NV). It was introduced on March 11, 2019, and signed into law by the president on Dec. 24.

Support for Suicide Prevention Coordinators Act (HR 2333) – This legislation requires the Government Accountability Office to report on the responsibilities, workload, training and vacancy rates of suicide prevention coordinators. The bill responds to reports that coordinators are overworked and unable to keep up with their many responsibilities, particularly in light of the recent increase in veteran suicides. The Act was introduced on April 18, 2019, by Rep. Anthony Brindisi (D-NY); it passed the House in May, the Senate in December and was signed into law on Dec. 20, 2019.

Further Consolidated Appropriations Act, 2020 (HR 1865) – This annual appropriations bill sets government spending limits for the current fiscal year (Oct. 1, 2019, through Sept. 30, 2020). Among a myriad of provisions, the bill extends funding for various health-related programs; deters pharmaceutical companies from blocking lower-cost generic alternatives from entering the marketplace; and repeals the Cadillac tax on expensive employer plans, the medical device excise tax, and the health insurance fee that was initially imposed by the Affordable Care Act. The final version of the bill was passed by the House and Senate in mid-December and signed by the president on Dec. 20, 2019.

National Defense Authorization Act for Fiscal Year 2020 (S 1790) – This $738 billion defense bill authorizes fiscal year 2020 appropriations and policies for the Department of Defense. Provisions include authorization for a sixth, stand-alone branch of the U.S. military service (Space Force); guaranteed 12 weeks of paid parental leave for federal workers; a 3.1 percent pay raise for active-duty personnel; allows for Liberian nationals living in the United States under Deferred Enforced Departure to apply for permanent residency; funding for improvements to military housing and health care; funding to purchase 60 F-35s for the Air Force; and a dictate that prohibits Turkey from participating in the F-35 program as long as it maintains a Russian-made missile system. Note that passage of this bill does not provide budget appropriations, which is authorized in subsequent legislation. This bill was passed in both the House and Senate on Dec. 17, 2019, and signed into law on Dec. 20, 2019.

FUTURE Act (HR 5363) – This bill permanently authorizes funding for historically Black colleges and universities and other minority-serving institutions, and increases appropriations for Pell Grants. The legislation was introduced by Rep. Alma Adams (D-NC) on Dec. 9, 2019, passed in both the House and Senate on Dec. 10, 2019, and signed into law on Dec. 19, 2019.

When Should You Switch Your Side Hustle to a Business Entity Structure?

4 min read

Side Business, How to File for Business EntityStarting a side hustle today is easier than ever. Between the numerous websites that act as marketplaces and project jobs that can be found on the internet, almost anyone can turn a skill or hobby they have into something they can make money off. Many people who do this are just looking to make a little extra money on the side, but this side hustle can turn into something bigger – and this is where the tax and legal questions come in.

Sole Proprietorship

For someone just starting or looking to make a little extra on the side, there’s nothing special you need to do when it comes to filing your federal taxes. Just complete an extra form that is called Schedule C of your personal tax return. This is referred to as doing business as a sole proprietorship.

But that is where the simplicity stops. While organizing your business, the default way as a sole proprietor takes the least effort and expense; however, there are risks associated with this path, particularly legal liability risks.

Legal Risks

The biggest problem is that the sole proprietorships form leaves personal as well as business assets exposed to the risk of being sued. Lawyers will often recommend that the moment a business has paying clients, it should be converted to an LLC or corporation to provide legal protection by separating the business and personal assets.

While this legal advice is technically true, it doesn’t consider the cost-benefit of the situation. The problem is that the costs of forming and running an LLC or corporation can easily exceed the money earned from a side hustle. Combine this with the probability of getting sued at all (in each personal situation) and for most side hustles, it’s simply not worth it to form an LLC or corporation. The key question then is when is it worth it to switch from a sole proprietorship to an LLC or a corporation?

When Side Hustle Grows Up

What about the taxation issue? Generally, tax savings aren’t a good reason to convert a sole proprietorship to an LLC or corporation. Particularly, making the move from a sole proprietorship to a single-member LLC will not help for tax purposes and in fact may only increase your chances of an audit. Moreover, operating as an LLC will cost more both for the initial filing as well as ongoing annual expenses. Legal liability remains the main reason to convert the entity structure.

Hidden Tax Issues

All three pass-through entity types (sole proprietor, LLC and S-Corporations) calculate your income in the exact same way under current laws. There is however a hidden tax to consider: the self-employment tax. Self-employment taxes are paid on all sole proprietor earnings, but only on the salary portion of LLC or S-Corp earnings. Any profits over and above your salary are considered dividend payments and are not subject to self-employment taxes.

Unfortunately, the income level needed to change entity structures depends on each individual situation, but you’ll need the savings to at least cover the initial and long-term compliance costs of filings, fees and tax preparation costs. Let’s look at two examples to see how this works.

Imagine a business is earning $100,000 in net profit and from this, you pay yourself $40,000 as salary and take the remaining $50,000 as dividends. At the current 15.3 percent self-employment tax rate, this translates into a savings of $7,650. Now imagine a side hustle that only earns $25,000 from which you take $15,000 as salary and the remaining $10,000 as dividends. This only translates into $1,530 in tax savings.

In the first case above, you’ve not only generated enough tax savings to more than cover your tax preparation and filing costs, but you’ll end up with more money in your pocket and have stronger legal protection. In the second case, you’ll barely save enough to cover your costs – and you’ll create more work for yourself.

Conclusion

Your side hustle might be small right now, but tomorrow it could grow into the next big thing, so make sure your organizational structure makes sense now.

Why eSignatures Are Better Than Handwritten Signatures

2 min read

Why eSignatures Are Better Than Handwritten Signatures

Signatures play an important role in authenticating a document or binding an individual by the provisions contained in a document. And sometimes, a handwritten signature can slow down the process. This is because it’s dependent on the availability of the parties that are involved. It also includes the exchange of paper. You can imagine if you are doing business with an overseas company and have to wait for the documents to be delivered before you can continue with the transaction.

Many business processes have now been automated – and the signing of documents is one of these processes that has been streamlined.

Here are some reasons that make e-signatures better than handwritten ones:

  • More secure: With handwritten signatures, you are never 100 percent sure that the signature has not been forged. To the contrary, with an e-signature you can always track it to see if the document was tampered with.
  • Reduces costs: E-signatures eliminate the cost of printing documents and the postage incurred with handwritten signed documents.
  • Speeds up processes: E-signatures speed up business processes, considering that today almost all documents can be delivered online in an instant.
  • You can do it for free: Some online programs provide signing digital documents for free. To prevent forgery, online signatures are protected through verification methods and security audits.
  • Integrates with modern business: Technology has helped businesses evolve to be automated, saving time and speeding up processes.
  • Easy to use: Users can sign documents online by tracing their handwritten signature using a stylus or with the click of a mouse button.
  • Easy to track documents: Unlike tracking a physical document, it’s easy to track documents signed online using most of the available e-signature software. This eliminates lost paperwork problems.

Clearly, electronic signatures now play a big role in businesses today due to their convenience. And with the growing trend for businesses to go paperless, anyone who wants to enhance the efficiency of their business has no choice but to use e-signatures.

How Businesses Benefit from Big Data Analytics

4 min read

Big Data AnalyticsPreviously we looked at the key technology trends in accounting to watch out for in 2020. Among the trends are big data and data analytics, which can have a great impact on businesses.

Business data has existed for a long time, whether in filing cabinets, ledgers or storage devices. But today businesses both large and small have to deal with huge collections of data every day. This has seen the rise of data analytics trends that include deep learning, machine learning and dark data.

Unfortunately, small and medium businesses (SMB) have to struggle with making a decision on implementing data analytics. This is largely because many SMB owners assume that data analytics is strictly for large organizations – especially because of the expectation that it’s expensive and complicated.

Luckily, reduced tech costs have made it possible for small and medium businesses to afford technologies that were previously only cost-effective for big organizations.

Is the Cost and Effort Worth It? 

Before the advent of big data analytics, customer data was collected using surveys or customer feedback forms. Analyzing such data is tedious, and it’s possible to miss out on important trends.

Also, imagine running marketing campaigns and having no way to track how effective the campaign was. If you do this in your business, you have no way to know who saw the ad or even the response.

Enter big data and analytics and the whole marketing landscape changes. With big data, a business has clear insights about customer behavior. This is possible because we now can track visitors to a website, the time a visitor spends on a given page, action taken such as making an order, the location the purchase came from and so many other details that help a business refine its marketing strategy.

Is it costly? You’d be surprised to know that you don’t need to purchase expensive software. You’ll find, for instance, that you can take advantage of data collected by the QuickBooks accounting software. And depending on your business needs, the software can be connected with low-cost platforms that enable more detailed analytics.

You also can get free platforms such as Google Analytics to analyze website traffic and gain insight into consumer behavior. Whatever your company size, you can take advantage of big data insights to better understand your customers.

Here are some reasons why it’s worth it:

  • Analytics help to launch effective marketing campaigns that result in better ROI.
  • Analytics help to track the customers in their sales cycle.
  • It’s possible to track the outcome of business decisions, such as promotional strategies.
  • You get to know which suppliers or other business partners to work with.
  • Provides insights on customers who are likely to pay on time based on historical payment data.
  • Improves customer service. This is possible when customer conversations from different channels are analyzed.
  • It helps to improve the product or service offered by a business.  
  • Identifies trends and patterns. For instance, you can track frequently asked questions and then create a page to handle the common questions.
  • Helps create a strong bond with customers. By understanding customer interests, a business will then engage with their customers by creating personalized offers and campaigns.
  • On the tech side, big data is being used to detect and prevent fraud.  
  • Analytics identify problematic areas of a business, and this makes it easier to come up with a response quickly before the problem escalates.

Become Smarter

When used correctly, data analytics can help a business gain a competitive advantage over other businesses. At the same time, it will also boost your business conversions and revenue. But collecting just any piece of data can be overwhelming and even a waste of time. The secret is in collecting data that will help you reduce business costs and increase your revenue.

4 Financial New Years Resolutions You Can Actually Keep

4 min read

4 Financial New Years Resolutions You Can Actually KeepBelieve it or not, it’s 2020. You’re not just starting a new year, you’re entering a new decade. With this in mind, you might want to make some resolutions that focus on your finances. According to  Psychology Today, 80 percent of resolutions fail by February. If you’re thinking about dieting or eating better, this isn’t very encouraging. However, when it comes to your money, there are some changes you can implement now that will have staying power and won’t be forgotten by spring.

Review Your Credit Report

This is important for your financial future in many ways, particularly if you want to buy a house or a car (and that’s just for starters). If you need to make some repairs to your score, the new year is the best time to do this. Better still, you’re entitled to three free reports each year. Check it out. See how you’re doing. You’ve got nothing to lose and everything to gain.

Get Out of Debt

This might be easier said than done, but it’s absolutely possible. One very helpful tool is Unbury.Me. It’s free and easy to use. Just create an account and map out a payment plan that works for you. If you want to wipe away your debt quickly, there’s the avalanche method, which attacks the highest interest rate debts first, then moves to the second highest and so on. But this isn’t the only solution. There’s another tool that actually uses your purchases to help you pay down debt: Qoins. Here’s how it works. You round your purchases to the nearest dollar, then apply the cash to your debt, i.e. student loans or credit cards. So, in essence, you can go on living your life while shrinking your debt.

Evaluate Your Insurance and Disability Insurance Needs

As you age, your insurance needs change. Think about how much protection you really need. For example, would you be better served by term or permanent life insurance? What about disability insurance? For the latter, make sure you have enough coverage. Life happens. It’s always best to be prepared.

Refresh Your Retirement Savings

If you work for a company that offers 401(k), 403(k) or 457 plans, consider asking your employer to withhold enough through salary deferrals to make sure you reach the maximum limit each year. If you’re over 50, you can raise the amount to make catch-up contributions. If you’re self-employed, you can contribute to a SEP IRA, profit-sharing plan or independent 401(k) plan. Making retirement deductions from your paychecks, especially when they’re maxed out, might take a bit of getting used to. But once you’ve retired, you’ll be very glad you had the foresight to act now.

Truth is that the above resolutions are just the tip of the moneyberg. You can go deeper into each area. If you want further assistance, consult a financial planner or your accountant. But the biggest takeaway from all these suggestions is simple: begin now, or as soon as you can. When you’re making the most of your money today, you’re working toward a more secure tomorrow.

Sources

https://www.investopedia.com/articles/pf/06/newyear.asp

https://www.psychologytoday.com/us/blog/modern-mentality/201812/why-new-years-resolutions-fail

https://www.investopedia.com/terms/c/catchupcontribution.asp

https://www.nbcnews.com/better/business/4-tech-tools-help-you-get-out-debt-faster-ncna828351

https://www.transunion.com/article/3-free-credit-reports

https://www.investopedia.com/terms/t/termlife.asp

https://www.investopedia.com/terms/p/permanentlife.asp

https://www.investopedia.com/terms/d/disability-insurance.asp

https://www.investopedia.com/terms/s/sep.asp

https://www.investopedia.com/terms/p/profitsharingplan.asp

https://www.investopedia.com/terms/i/independent_401k.asp

Economic Correlation: Cyclical and Non-Cyclical Stocks

3 min read

Cyclical and Non-Cyclical StocksA rising tide might lift all boats, but the same cannot be said for the economy.

When the U.S. experiences robust economic growth, certain sectors of the stock market tend to rise while others hold steady or even decline by comparison. The stocks of companies that experience higher revenues are typically categorized as cyclical. In other words, their good fortune rests mainly on consumers being gainfully employed and having ample discretionary income with which to buy more goods and services.

Take, for example, auto manufacturers. Sales typically increase when more people can afford to buy a new car. But that’s not all the time, because the economy is cyclical – it ebbs and flows over time. Therefore, companies that produce non-essential products – sometimes referred to as consumer discretionary goods and services – tend to flourish during economic cycles of strength and rising GDP. That is why they are called cyclical stocks.

But when the economic future is in decline or at least uncertain, people tend to delay buying non-essential items like a new car. When the economy really takes a nosedive, more consumers are affected, they buy less stuff, manufacturing takes a hit and companies start laying off their workforce.

Despite these unfortunate circumstances, people still have to eat. They buy essential items, such as food and toothpaste and toilet paper. These are considered consumer staples, and the stocks of companies that produce these types of goods are defined as non-cyclical stocks. That’s because those companies are expected to continue earning revenues regardless of economic cycles. Non-cyclical industries include food and beverage, tobacco, household and personal products.

Another non-cyclical sector is utilities. Utilities are a little bit different because people tend to purchase relatively the same amount of utility service – with exceptions for extreme weather or making slight thermostat adjustments to save money – whether the economy is robust or in a downward spiral. Because of this, utility companies are considered a very stable business model.

For investors, that means they are well-established, long-term performers and usually pay out high dividends. Not only are utility stocks a good option for retirees seeking income to supplement their Social Security benefits, but they offer a safe haven for investors to relocate assets during periods of economic decline.

In light of recent cautions by economists predicting a recession in 2020, this could be a good time to review your portfolio from the perspective of cyclical versus non-cyclical holdings. It doesn’t mean you need to sell completely out of your stock allocation; perhaps just temper your holdings to equities that tend to perform reliably regardless of the economy. In addition to consumer staples and utilities, consider companies that specialize in national defense, waste management, data processing and payments.

Also be aware that the past three decades have boasted several of the longest running economic expansions in U.S. history (1991 to 2001; 2001 to early 2007; 2009 through 2019). What this tells us is that U.S. economic growth cycles appear to be lengthening while declines are relatively shorter and followed up with impressive recovery periods.

So, take heart. If you decide to transfer some of your assets to less flashy, non-cyclical securities, you might not have to leave them there for long. However, it’s always a good idea to maintain a diversified portfolio so you don’t have to make adjustments based on economic cycles. And as always, consult an investment professional to help you make these important decisions.

How to Calculate and Analyze Return on Equity

3 min read

How to Calculate and Analyze Return on EquityWhen it comes to evaluating a business, especially one that is publicly traded, determining its return on equity (ROE) is one way to see how it’s performing.

What is Return on Equity?

Return on equity is a ratio that gives investors insight into how effectively the company’s management team is taking care of the shareholders’ financial investments in the company. The greater the ROE percentage, the better the business’ management staff is at making income and creating growth from shareholders’ investments.  

How ROE is Determined

In order to calculate ROE, a company’s net income is divided by shareholder equity. To arrive at net income, businesses account for the cost of doing business, which includes the cost of goods sold, sales, operating and general expenses, interest, tax payments, etc. and then subtracts these costs of doing business from all sales. Similarly, the free cash flow figure can be substituted in place of net income.

There are some caveats when it comes to calculating net income. It is determined prior to paying out dividends to common shareholders, but loan interest and preferred shareholder dividend obligations must be met before starting this calculation.

The other part of the equation is the shareholder equity or stockholders’ equity. One definition is to subtract existing liabilities from a business’ assets, and what remains is what owners of a corporation or its shareholders would be able to claim as their equity in the company. Whether it’s done year over year or quarter over quarter, traders and investors can see how well a company performs over different time periods.

Return on equity is also able to be determined if a business’ net income and equity are in the black. The net income is found on the income statement – the ledger of the company’s financial transactions. Shareholders’ equity is found on the balance sheet – which details the business’ assets and financial obligations.

Analyzing a Business’ ROE

Another consideration that industry experts recommend to determine if a company’s ROE is poor or excellent is to see how it compares to the S&P 500 Index’s performance. With the historical rate of return being 10 percent annually over the past decade, and if a ROE is lower than 10 percent, it can give a good indication as to a particular business’ performance. However, a particular company’s ROE also needs to be compared against the industry’s ROE to see if the company is outperforming its sector.

For example, according to Yahoo Finance!, the ROE on Microsoft’s stock is 42.80 percent. This means that the management team running Microsoft is returning just shy of 43 cents for every dollar in shareholders’ equity. Compared to its industry (Software System & Application) ROE of 13.47percent – as cited by New York University’s Stern School of Business – Microsoft has a much higher ROE compared to the industry average. This is just one metric to measure the company’s performance, but it is an important one.

While looking at a company’s return on equity is not the end all or be all, it’s a good start to determine a company’s present and future financial health.

Sources

https://us.spindices.com/indices/equity/sp-500

https://finance.yahoo.com/quote/MSFT/key-statistics?p=MSFT

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/roe.html

Protecting TV Viewers, Whistleblowers and Supreme Court Justices; New Status Provisions for Immigrant Workers; and OTC Drugs

3 min read

Protecting TV Viewers, Whistleblowers and Supreme Court Justices; New Status Provisions for Immigrant Workers; and OTC DrugsReauthorizing Security for Supreme Court Justices Act of 2019 (HR 4258) – This bill reauthorizes the Marshal of the Supreme Court and the Supreme Court Police to protect the Justices of the Supreme Court, their employees and official guests outside of the Supreme Court grounds. The legislation was sponsored by Rep. Greg Stanton (D-AZ). It was introduced on Sept. 9, 2019, and signed into law by the president on Nov. 27, 2019.

Farm Workforce Modernization Act of 2019 (HR 5038) – This bill amends the Immigration and Nationality Act to provide for terms and conditions for nonimmigrant workers performing agricultural labor. Under this law, certified agricultural worker (CAW) status may be granted to someone who 1) performed at least 1,035 hours of agricultural labor during the two-year period prior to Oct. 30, 2019, 2) was inadmissible or deportable on that date, and 3) has been continuously present in the United States from that date until receiving CAW status. The CAW status is valid for five and a half years with the option to extend, and the Department of Homeland Security may grant dependent status to the spouse or children of a principal alien. The legislation was introduced by Rep. Zoe Lofgren (D-CA) on Nov. 12, 2019, and passed in the House in December 2019. It is currently in the Senate for consideration.

Television Viewer Protection Act of 2019 (HR 5035) – This bill was introduced by Rep. Michael Doyle Jr. (D-PA) on Nov. 12, 2019, passed in the House of Representatives and currently awaits review in the Senate. The legislation would ban hidden fees from cable providers by requiring them to disclose all itemized charges, fees and estimated taxes in the total price before a consumer signs up for a video package (whether offered individually or as part of a bundle). The bill also would give customers the right to cancel service without penalty within 24 hours of purchasing the service plan.

The Over-the-Counter Monograph Safety, Innovation and Reform Act (S 2740) – Introduced on Oct. 30, 2019, by Sen. John Isakson (R-GA), this bill would add new incentives to the FDA’s process for approving drugs that do not require a prescription. It would allow an over-the-counter drug manufacturer to request 18 months of exclusivity upon FDA approval for products that are new to the OTC market. The application would require a user fee ranging from $100,000 to $500,000, depending on the type of OTC product. This legislation passed the Senate on Dec. 10, 2019, and is currently under consideration in the House.

Engineering Biology Research and Development Act of 2019 (HR 4373) – This bill would establish a federal engineering biology research initiative to bolster U.S. leadership in engineering biology, among other provisions. The bill was introduced on Sept. 18, 2019, by Rep. Eddie Johnson (D-TX) and passed the House on Dec. 9, 2019. It is currently in the Senate.

Department of Homeland Security Office of Civil Rights and Civil Liberties Authorization Act (HR 4713) – Following the emergence of whistleblowers worried about their civil rights, this legislation would give the Civil Rights and Civil Liberties Office new authority to ensure that the rights of individuals subject to its programs and activities are protected. Specifically, the bill would allow each Homeland Security department to appoint its own civil rights and liberties officer and grant them the authority to access all relevant department records, as well as subpoena non-federal entities. The bill was introduced on Oct. 17, 2019, by Rep. Al Green (D-TX) and passed in the House on Dec. 9, 2019. It is currently awaiting consideration by the Senate.

2020 Tax Brackets, Deductions, Plus More

4 min read

2020 Tax Brackets, 2020 Deductions,2020 IRS Tax Rates Beginning on Jan. 1, 2020, the Internal Revenue Service (IRS) has new annual inflation adjustments for tax rates, brackets, deductions, and retirement contribution limits. Note, the amounts below do not impact the tax filing you make in 2020 for the tax year 2019. These amounts apply to your 2020 taxes that you will file in 2021.

2020 Tax Rates and 2020 Tax Brackets

Below are the new 2020 tables for personal income tax rates. There are separate tables each for individuals, married filing jointly couples and surviving spouses, heads of household and married filing separate; all with seven tax brackets for 2020.

Tax Brackets & Rates – Individuals
Taxable Income Between Tax Due
$0 – $9,875 10%
$9,876 – $40,125 $988 plus 12% of the amount over $9,875
$40,126 – $85,525 $4,617 plus 22% of the amount over $40,125
$85,526 – $163,300 $14,605 plus 24% of the amount over $85,525
$163,301 – $207,350 $33,271 plus 32% of the amount over $163,300
$207,351 – $518,400 $47,367 plus 35% of the amount over $207,350
$518,400 and Over $156,234 plus 37% of the amount over $518,400

 

Tax Brackets & Rates – Married Filing Jointly and Surviving Spouses
Taxable Income Between Tax Due
$0 – $19,750 10%
$19,751 – $80,250 $1,975 plus 12% of the amount over $19,750
$80,251 – $171,050 $9,235 plus 22% of the amount over $80,250
$171,051 – $326,600 $29,211 plus 24% of the amount over $171,050
$326,601 – $414,700 $66,542 plus 32% of the amount over $326,600
$414,701 – $622,050 $94,734 plus 35% of the amount over $414,700
$622,050 and Over $167,306 plus 37% of the amount over $622,050

 

Tax Brackets & Rates – Heads of Households
Taxable Income Between Tax Due
$0 – $14,100 10%
$14,101 – $53,700 $1,410 plus 12% of the amount over $14,100
$53,701 – $85,500 $6,162 plus 22% of the amount over $53,700
$85,501 – $163,300 $13,158 plus 24% of the amount over $85,500
$163,301 – $207,350 $31,829 plus 32% of the amount over $163,300
$207,351 – $518,400 $45,925 plus 35% of the amount over $207,350
$518,400 and Over $154,792 plus 37% of the amount over $518,400

 

Tax Brackets & Rates – Separately
Taxable Income Between Tax Due
$0 – $9,875 10%
$9,876 – $40,125 $988 plus 12% of the amount over $9,875
$40,126 – $85,525 $4,617 plus 22% of the amount over $40,125
$85,526 – $163,300 $14,605 plus 24% of the amount over $85,525
$163,301 – $207,350 $33,271 plus 32% of the amount over $163,300
$207,351 – $311,025 $47,367 plus 35% of the amount over $207,350
$311,025 and Over $83,653 plus 37% of the amount over $311,025

 

Trusts and Estates have four brackets in 2020, each with different rates.

Tax Brackets & Rates – Trusts and Estates
Taxable Income Between Tax Due
$0 – $2,600 10%
$2,601 – $9,450 $260 plus 12% of the amount over $2,600
$9,451 – $12,950 $1,904 plus 35% of the amount over $9,450
$12,950 and Over $3,129 plus 37% of the amount over $12,950

 

Standard Deduction Amounts

Amounts for standard deductions see a slight increase from 2019 to 2020 based on indexing for inflation. Note that again as in 2019, there are no personal exemption amounts for 2020.

Standard Deductions
Filing Status Standard Deduction Amount
Single $12,400
Married Filing Jointly & Surviving Spouses $24,800
Married Filing Separately $12,400
Heads of Household $18,650

 

Alternative Minimum Tax (AMT) Exemptions

Like the above, the AMT exemption amounts are increased based on adjustments for inflation, with the 2020 exemption amounts as follows.

 

Alternative Minimum Tax (AMT) Exemptions
Filing Status Standard Deduction Amount
Individual $72,900
Married Filing Jointly & Surviving Spouses $113,400
Married Filing Separately $56,700
Trusts and Estates $25,400

 

Capital Gains Rates

Capital gains rates remain unchanged for 2020; however, the brackets for the rates are changing. Taxpayers will pay a maximum 15 percent rate unless their taxable income exceeds the 37 percent threshold (see the personal tax brackets and rates above for your individual situation). If a taxpayer hits this threshold, then their capital gains rate increases to 20 percent.

Itemized Deductions

Below are the 2020 details on the major itemized deductions many taxpayers take on Schedule A of their returns.

  • State and Local Taxes – The SALT deductions also remain unchanged at the federal level with a total limit of $10,000 ($5,000 if you are married filing separately).
  • Mortgage Deduction for Interest Expenses – The limit on mortgage interest also remains the same with the debt bearing the interest capped at $750k ($375k if you are married filing separately).
  • Medical Expense Note – The Tax Cuts & Jobs Act set the medical expense threshold at 7.5% of adjusted gross income (AGI) for years 2017 and 2018. The threshold was set to increase to 10% of (AGI) for 2019 and beyond. This Act (TCJA) extends the 7.5% of AGI, through 2020.

Retirement Account Contribution Limits

Finally, we look at the various retirement account contribution limits for 2020.

  • 401(k) – Annual contribution limits increase $500 to $19,500 for 2020
  • 401(k) Catch-Up – Employees age50 or older in these plans can contribute an additional $6,500 (on top of the $19,500 above for a total of $26,000) for 2020. This $500 increase in the catch-up provision is the first increase in the catch-up since 2015.
  • SEP IRAs and Solo 401(k)s – Self-employed and small business owners, can save an additional $1,000 in their SEP IRA or a solo 401(k) plan, with limits increasing from $56,000 in 2019 to $57,000 in 2020.
  • The SIMPLE – SIMPLE retirement accounts see a $500 increase in contribution limits, rising from $13,000 in 2019 to $13,500 in 2020.
  • Individual Retirement Accounts – There are no changes here for IRA contributions in 2020, with the cap at $6,000 for 2020 and the same catch-up contribution limit of $1,000.

Conclusion

There are no dramatic changes in the rates, brackets, deductions or retirement account contribution limits that the vast majority of taxpayers tend to encounter for 2020 versus 2019. Most changes are simply adjustments for inflation. Enjoy the stability – as history has shown, it likely won’t last long.