Top 20 Tax Changes for 2019
There are so many tax changes for 2019 that we needed to double our normal Top 10 list! The Tax Cut and Jobs Act (the “Tax Act”) enacted at the end of 2017 produced sweeping changes to tax rates and deductions for both businesses and individuals. These tax changes will finally have their full impact on the 2018 tax return. Most of these changes are only in effect until 2025 when the prior rules and rates return. If you have any questions about the effect of these tax changes on your personal situation, please contact us at 407-629-6477.
- Lower Income Tax Rates. While the Tax Act did not reduce the number of different income tax rates, it did lower nearly all of these rates typically by 3 full percentage points. For example, the top rate of 39.6% reduces to 37% while the 25% rate mostly shifts to 22%. The new rates are now 10%, 12%, 22%, 24%, 32%, 35% and 37%. These across the board cuts translate to an average estimated tax savings of $1,600 per household in 2018. Retirees may want to adjust their tax withholding to reflect this drop in taxes and workers may want to use these savings to more fully fund their retirement plans. Going forward, the brackets will be adjusted on a different inflation measure that is expected to grow more slowly than the previous inflation measure.
- Higher Standard Deduction (But No Personal Exemptions). The Tax Act increased the standard deduction from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for couples. For 2019, these amounts increase to $12,200 for single and $24,400 for joint filers. An additional standard deduction of $1,600 for singles and $1,300 per person for couples is allowed for those that are blind or over age 65. The new standard deduction for Head of Household filers is $18,000. This change effectively reduces the need to itemize deductions and simplifies tax preparation for millions of Americans. Nearly 70% of taxpayers who currently itemize will no longer need to take those extra steps on their tax returns. However, the trade off to this higher deduction was the elimination of the personal exemption which amounts to a deduction of $4,150 for each person or dependent on a tax return.
- Higher Contribution Limits for 401(k)s, 403(b)s, 457s, Simple IRAs, IRAs & HSAs. The contribution limits to retirement accounts increases for 2019. For 401(k)s, 403(b)s and 457s the limit increases from $18,500 to $19,000. For those over age 50, the catch-up contribution limit remained at $6,000 allowing for a maximum possible contribution of $25,000 for 2019. The limit for SIMPLE IRAs increases from $12,500 to $13,000 with the over age 50 catch up contribution staying at $3,000. The annual limit on Traditional IRAs and Roths increases to $6,000 for 2019 from $5,500 for 2018. The age 50 catch-up contribution remains at $1,000 for these accounts. The Health Savings Account limits also increases from $3,450 in 2018 to $3,500 in 2019 for individual plans while family plan contribution limits increase from $6,900 to $7,000. In addition, HSA account holders age 55 and older may contribute an extra $1,000 annually. These increases reflect inflation adjustments on the contribution limits and allow tax payers to save more.
- Limits on Deductions for State and Local Income, Sales and Real Estate Taxes. Previously, taxpayers could fully deduct their real estate taxes plus either state and local income taxes or general sales taxes. Starting in 2018, the total amount of these deductions is capped at $10,000. This provision most negatively effects those individuals who live in states with high income taxes and high real estate taxes. Like many other provisions, this cap expires in 2025 so the old rules could return in 2026.
- Limits on Mortgage Interest Deductions. Starting in 2018, the maximum amount of mortgage debt that one can deduct the interest on reduces from $1 million to $750,000. This aggregate limit applies to the combined mortgage amounts for first and second homes. This change does not affect existing loans or future refinances of existing loans that don’t increase the amount owed. The impact of this change is somewhat minimal though as less than 4% of outstanding mortgages had balances greater than $750,000. However, this change also eliminates the ability to deduct interest on home equity loan balances unless these proceeds were used to buy, build or substantially improve a primary residence or a second home. On a positive note, the new law preserves the valuable break that allows taxpayers to avoid capital gains on the sale of a primary residence up to $250,000 for individuals and $500,000 for couples.
- Medical Expense Deduction Changes. For 2018, taxpayers can deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income. Unfortunately for 2019, this threshold increases up to 10%, effectively making the write off for medical expenses even harder. In a blow to Obamacare, starting in 2019 (not 2018), the Tax Act also permanently eliminates the penalty for not having health insurance.
- Limits on Itemized Deductions Suspended. For taxpayers who do itemize, they may wind up with more deductions then before. Previously, at certain income levels, the amount of itemized deductions was limited. Currently, this income limitation has been removed so taxpayers can deduct all of their itemized deductions.
- Other Itemized Deduction Changes. Casualty and theft losses are now deductible only to the extent they are attributable to a federally declared disaster. The limit on charitable contributions of cash increased from 50% to 60% of adjusted gross income. Most importantly the deduction for unreimbursed job-related expenses such as uniforms, union dues, and business-related meals, entertainment and travel plus similar deductions for tax preparation fees and investment expenses have all been suspended. Previously, these expenses were deductible to the extent they exceeded 2% of your adjusted gross income. Traveling sales people, airline employees and similar occupations will bear the brunt of this lost deduction.
- Expanded Child Tax Credit. The Child Tax Credit allows for a reduction in federal income taxes for each child under the age of 17 that is claimed as a dependent. The Tax Act doubles this credit from $1,000 per child to $2,000. In addition, up to $1,400 of this expanded credit can be refunded even if one doesn’t owe any income taxes. The number of taxpayers eligible for this credit also expands as the income eligibility thresholds increased from $75,000 to $200,000 for singles and from $110,000 to $400,000 for couples. There is also a new $500 non-refundable credit for qualified non-child dependents, such as elderly parents or older children, who are claimed on one’s tax return.
- Expansion of Alternative Minimum Tax Threshold. The Alternative Minimum Tax is a parallel tax system designed to ensure that high income earners pay a larger amount of taxes. However, in recent years, the AMT has begun to apply to many middle-class households because its threshold has not increased much. The Tax Act effectively expands the AMT threshold to the point that it is unlikely to affect families with incomes less than $1 million.
- Moving Expenses Write Off Changed. The deduction for moving expenses is also suspended. Consequently, those moving for work will not be able to deduct their moving costs unless they are members of the U.S. military on active duty. In addition, any moving amount reimbursed by an employer must now be counted as taxable income to the employee.
- Recharacterization Option Eliminated. Recharacterization of a previous Roth conversion is no longer allowed. Previously, one was able to undo a Roth conversion and avoid the tax bill if the recharacterization was done by October 15 of the subsequent year. Taxpayers should be absolutely certain of the tax impact of a Roth conversion before implementing one because now there is no opportunity to correct any miscalculations to avoid the corresponding tax bill of a Roth conversion.
- Corporate Tax Rates. The biggest change under the Tax Act is the permanent reduction of the corporate tax rate from 35% to 21%. This change puts the U.S. on equal footing with most other major economies that have reduced corporate tax rates over the past decade. This cut increased corporate earnings by nearly 10% in 2018 and will continue to be a further boon to equity investors. In an effort to encourage multi-national corporations to repatriate some of their overseas profits back to the U.S., a special one-time 15.5% tax rate now applies to those re-patriated dollars. Smaller companies that are typically pass-through businesses such as partnerships and S-corporations would also benefit from lower taxes by virtue of a deduction of up to 20% of their income. This deduction (referred to as a section 199A deduction) phases out at income levels above $157,500 for singles and $315,000 for couples for 2018. The deduction amount is calculated as a function of the amount of wages paid to the business owner.
- Energy Tax Credits. The tax credit for qualifying solar systems has been extended through 2021. This tax credit was originally scheduled to decrease from 30% of the value of a panel to 10% in 2017. The tax credit will now stay at 30% of value until 2019 before falling to 26% in 2020, 22% in 2021 and then 10% in 2022. Purchasers of such systems need to be mindful that such tax credits are not refundable, so one should not assume receipt of the full tax credit. A tax credit also remains for qualified energy efficient home insulation and exterior doors and windows. This credit is worth a maximum of either 10% of the cost or $500 and must be combined with any prior usage of this tax credit going back to 2006.
- Estate Tax Exemption. While not eliminating estate taxes, the Tax Act substantially increases the threshold where Americans would owe estate taxes at their passing. The estate tax exemption doubled from $5.49 million per person to $10.98 million in 2018. This change means that only truly ultra-rich estates would ever pay any estate taxes since a married couple could combine their exemptions to pass a total of nearly $22 million with no estate taxes. After doubling for 2018, the estate tax exemption increases even further in 2019 to $11.4 million per person. The annual gift exclusion (the amount you can give to somebody with no reporting requirements) remains at $15,000.
- Alimony Payments. Starting in 2019, the deduction of alimony payments will not be allowed, and recipients would not need to report alimony received as income. This is a significant change that will affect the outcome of most divorce proceedings. In effect, this should reduce the actual amount of alimony payments since there is no tax benefit for the payor.
- Education Related Deduction. The education expense deduction of $250 per year for unreimbursed classroom supplies also remains along with the ability to deduct student loan interest up to $2,500. 529 plans can now be used for K-12 expenses up to $10,000 per year of tuition. Previously, such plans could only be used for post-secondary educational expenses.
- 401(k) Loan Payment. Under the new law, people who leave a company with a 401(k) loan outstanding would be able to repay the loan by the day they file their federal tax returns and avoid any and all taxes and penalties on the loan amount. This is a provision that adds flexibility for taxpayers and gives them an opportunity to avoid any applicable taxes and penalties.
- RMD to Charitable Organizations. Individuals over age 70½ who must take Required Minimum Distributions from their retirement accounts can make those distributions tax-free directly to charitable organizations. This allows taxpayers to get the tax savings benefit of a charitable contribution without having to itemize. Taxpayers who still want to make charitable contributions and get a direct tax deduction for them should take advantage of this provision.
- Capital Gains & Dividend Tax Rates. The Medicare/Obamacare Tax of 3.8% on dividends and capital gains remains. This additional tax applies to investment (unearned) income for single filers with income above $200,000 and married filers with income above $250,000. Investment income includes dividends, interest, rents, royalties and capital gains. For individuals earning more than $425,801 or couples earning more than $479,901, the long-term capital gain and dividend rates are at 20%. However, most taxpayers will be subject to rates that are either at 0% for those in the 10% or 15% ordinary income tax brackets or 15% for those in higher income tax brackets. These tax provisions still demonstrate a tax policy preference for dividends from stocks over interest from bonds, CDs or savings accounts.
The legal and tax information contained herein is merely a summary of our understanding and interpretation of current tax laws as of January 1, 2019 and is not exhaustive. Where indicated, past performance is not a guarantee or indication of future performance. Nelson Financial Planning, Inc. offers securities through Nelson Ivest Brokerage Services, Inc., a member of FINRA, MSRB and SIPC.