Late last year, the IRS announced the tax year 2019 annual inflation adjustments for more than 60 tax provisions, including those for tax brackets that determine the rate we pay on taxable income. Revenue Procedure 2018-57 provides details about these annual adjustments.
1. Tax brackets and tax rates have changed. Table 1 and table 2 compare the tax tables for 2019 versus 2018. For example, if you are single and your taxable income on line 11b of the Form 1040 is $84,000, your top marginal rate is 22%.
Source: Tax Foundation 2019 Federal Tax Rates, IRS US Tax Center 2018 Federal Tax Rates
*or Qualifying widow/widower
Source: IRS provides tax inflation adjustments for tax year 2019
2. The personal exemption has been eliminated with tax reform; child tax credit increased. The $4,050 personal exemption was eliminated starting 2018. However, the child tax credit doubled to $2,000 per qualifying child, subject to income limitations.
It is available to parents of children 16 or younger. It begins to phase out at $200,000 of modified adjusted gross income for single filers. This amount is $400,000 for married couples filing jointly.
3. The increase in the standard deduction will simplify filing for some folks. The standard deduction for married filing jointly rises to $24,400 for tax year 2019, up $400 from the prior year.
For single taxpayers and married individuals filing separately, the standard deduction rises to $12,200 for 2019, up $200. For heads of households, the standard deduction will be $18,350 for tax year 2019, up $350.
4. Some itemized deductions have been reduced or eliminated. If you itemize, state and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above cannot be written off against income.
All miscellaneous itemized deductions are eliminated, including deductions for unreimbursed employee expenses, tax preparation fees, the deduction for theft, and personal casualty losses, although certain casualty losses in federally declared disaster areas may still be claimed.
For charitable contribution, you may generally deduct up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases.
In 2019, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 10% of adjusted gross income. That’s up from 7.5% of AGI in 2017 and 2018.
5. Penalties have been eliminated for not maintaining minimum essential insurance coverage. This is per the Tax Cuts and Jobs Act; for 2018 the penalty was $695.
6. Estates of decedents who die during 2019 have a basic exclusion amount of $11,400,000, up from a total of $11,180,000 for estates of decedents who died in 2018. The annual exclusion for gifts is $15,000 for calendar year 2019, as it was for calendar year 2018.
7. Changes to the AMT – the alternative minimum tax. Tax reform failed to do away with the alternative minimum tax (AMT), but it snags far fewer people.
For tax year 2019 the AMT exemption amount is $71,700 and begins to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption begins to phase out at $1,020,600).
The 2018 exemption amount was $70,300 and began to phase out at $500,000 ($109,400 for married couples filing jointly and began to phase out at $1 million).
Yes, it’s confusing, but most tax software programs run both calculations for you.
8. There is a 20% deduction for business owners. The new law gives “flow-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.
This is a very valuable benefit to business owners who aren’t classified as C-corps and wouldn’t benefit from 2018’s reduction in the corporate tax rate to 21% from 35%.
REITs and MLPs are also eligible for the deduction.
The deduction is generally available to eligible taxpayers whose 2019 taxable incomes fall below $321,400 for joint returns and $160,700 for single and married filing separately.
The deduction does not reduce earnings subject to the self-employment tax.
There are limitations to the new deduction and some aspects are complex. Feel free to check with your tax advisor to see how you may qualify.
The points above are simply summary. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s have a conversation.