What are the adjustments to the 2020 US tax brackets? 

We’re at the start of a new year, and that means changes to US taxes by the Inland Revenue Service (IRS). In this blog we’ll be looking at changes to US taxes for 2020, and the impact these may have on US expats. 

As this is an election year, there is also much speculation about further changes in 2021 and beyond. However, for now this is all conjecture, but we do have adjusted tax brackets for 2020, and information on exclusions and credits. All of which is important for US expats to be aware of even as they prepare to file their 2019 taxes.  

The IRS adjusts tax brackets every year, along with exclusion thresholds and the Standard Deduction, all in line with inflation. Figures for 2020 are below, and apply to this tax year, which runs from 1 January 2020 to 31 December 2020. US expats, along with all US citizens, will file taxes based on these in 2021. This year, US expats must ensure they file federal taxes with the IRS based on the 2019 tax figures. 

Most US expats will end up owing either very little or nothing at all to the IRS, due to various tax credits available to them. However, in order to be compliant and up to date with their tax obligations, they must always file a tax return, and ensure they include every possible tax credit. A minority of US expats will still owe the US Government some income tax. 

US expats living and working in the UK must, therefore, keep abreast of changes made to tax laws on both sides of the Atlantic. US tax brackets for 2020 are as follows. Note that these are based on individuals only, and that married couples and Heads of Households (HoH) brackets are different. For a full list of all the tax brackets for the 2020 tax year, see the IRS website. 

$518,401 – 37% (up from $510,301 in 2019)

$207,351 to $518,400 – 35% (up from $204,101 to $510,300 in 2019)

$163,301 to $207,350 – 32% (up from $160,726 to $204,100 in 2019)

$85,526 to $163,300 – 24% (up from $84,201 to $160,725 in 2019)

$40,126 to $85,525 – 22% (up from $39,476 to $84,200 in 2019)

$9,876 to $40,125 – 12% (up from $9,701 to $39,475 in 2019)

$0 to $9,875 – 10% (up from $9,700 in 2019). 

The most important tax credits and provisions for reducing tax for most US expats are:

The FEIE is one of the primary tax credits available to US expats. It’s designed to ensure that they don’t have to pay double taxes and works by offsetting the first chunk of their earned income from US taxes. The threshold for 2020 is $107,600, up from $105,900. This is not an automatic tax credit and to qualify for it, US expats must file Form 2555 along with their federal tax return. 

CTC stays at $2,000 for 2020, the rate it has been since 2018. The refundable portion of this that can be claimed by most US expat parents also remains the same at $1,400 per child. 

The Standard Deduction for 2020 rises to $12,400 from $12,200 in 2019. 

All US citizens and greencard holders must file federal tax returns covering their worldwide income every year. There are no exceptions to this, and the US Government is notorious for taxing its citizens regardless of where they live and work. 

As US expats in the UK also have to file UK taxes with HMRC, there are various ways they can avoid paying twice on the same income. As explained above, one of the most popular ways to do this is by filing for the FEIE. Alternatively, they can claim the Foreign Tax Credit (FTC), which allows them to claim US tax credits up to the value of taxes they’ve already paid to the other country. 

Which works best depends on individual circumstances. If a US expat fails to file a tax return at all, they still owe taxes and the chances are will come against the IRS at some point. The Streamlined Procedures do offer a kind of amnesty for expats who need to catch up on their taxes, but only if the IRS deems that they didn’t purposely neglect to file. 

Expats must also file a Foreign Bank Account Report (FBAR) in order to report any overseas bank and investment accounts they have, as well as business interested in other countries. It’s a complex and important process, and our advice at Ingleton Partners is always to use an expat tax specialist. We can help US expats ensure that they are fully compliant and avoid any penalties as well as keeping their tax bill as low as possible. Contact the team here if you are a US expat with questions about your own situation.