2019 Individual Tax Planning Considerations
By Terice Barnett
As the 2019 tax filing season approaches, it is a good idea to know the current income limitations and the amounts of tax credits and deductions you may be eligible for so that you can plan your tax year accordingly. Below are some tax tips and a list of key adjustments to know when filing your 2019 tax returns. You can find a full list for 2019 in Revenue Procedure 2018-57.
Tax Rates for 2019
- 37% for individual taxpayers with incomes greater than $510,300 ($612,350 for married couples filing jointly). 35% for individual taxpayers with incomes over $204,100 ($408,200 for married couples filing jointly);
- 32% for individual taxpayers with incomes over $160,725 ($321,450 for married couples filing jointly);
- 24% for individual taxpayers with incomes over $84,200 ($168,400 for married couples filing jointly);
- 22% for individual taxpayers with incomes over $39,475 ($78,950 for married couples filing jointly);
- 12% for individual taxpayers with incomes over $9,700 ($19,400 for married couples filing jointly).
- 10% for individual taxpayers with incomes of $9,700 or less ($19,400 for married couples filing jointly).
The limitation on itemized deductions for 2019 was eliminated by the Tax Cuts and Jobs Act (TCJA). However, some taxpayers may benefit by alternating between claiming the standard deduction some years and itemizing deductions other years, particularly if it is possible to “lump” many deductions into those years. For example, taxpayers may want to consider making a substantial charitable contribution during a tax year when itemizing instead of making regular, annual gifts. In addition, with the repeal of the “Pease rule,” there are no phaseouts on itemized deductions at higher income levels.
The Alternative Minimum Tax exemption amount for tax year 2019 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).
The tax year 2019 maximum Earned Income Credit amount is $6,557 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,431 for tax year 2018. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
Beginning in 2019, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,700, up $50 from the limit for 2018.
For tax year 2019, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, an increase of $50 from tax year 2018; but not more than $3,500, an increase of $50 from tax year 2018. For self-only coverage, the maximum out-of-pocket expense amount is $4,650, up $100 from 2018.
For participants with family coverage, the floor for the annual deductible is $4,650, up from $4,550 in 2018. However, the deductible cannot be more than $7,000, up $150 from the limit for tax year 2018. For family coverage, the out-of-pocket expense limit is $8,550 for tax year 2019, an increase of $150 from tax year 2018.
The 2019 adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $116,000, increased from $114,000 for tax year 2018.
For tax year 2019, the foreign earned income exclusion is $105,900, increased from $103,900 for tax year 2018.
Estates of decedents who die during 2019 have a basic exclusion amount of $11,400,000, up from $11,180,000 in 2018. Additionally, many states have estate or inheritance taxes. There are several states that are “decoupled” from the federal estate tax system. This means the state applies different tax rates or exemption amounts. A taxpayer may have net worth comfortably below the federal exemption amount, but may be well above the exemption amount for his or her state. It is important to consult with an attorney on specific state laws and potential mitigation options.
The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $14,080, up from $13,810 for 2018.
Consider investing in municipal bonds to generate tax-free income. Municipal bonds, even with reduced tax rates, may still be attractive on a relative tax basis for higher-income taxpayers. Especially, taxpayers who find themselves subject to the 3.8% surtax on net investment income. The tax equivalent yield is higher for those taxpayers.
Maximize the 20% deduction for Qualified Business Income (QBI). The TCJA introduced a new provision (Section 199A) that allows certain taxpayers to generally deduct 20% of QBI on their tax return. Business income from pass-through entities such as sole proprietorships, partnerships, LLCs, and S Corps may qualify for this new deduction. Certain types of businesses — defined as a specified service trade or business (SSTB) — may be limited from taking the deduction based on the taxpayer’s household taxable income. The deduction is subject to a phaseout for SSTBs once income exceeds $160,700 ($321,400 for married couples filing a joint return). SSTBs include businesses performing services in fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and certain brokerage services. Business owners impacted by the income phaseout may want to consider strategies to reduce taxable income such as funding retirement accounts, deferring income, or accelerating business expenses.
Take advantage of expanded opportunities with 529 Plans, which have been expanded to allow taxpayers to pay for a child’s education at any level. This will be an obvious benefit if you have one or more children in private schools or are considering making the move in 2019. Please note that the $10,000 limit is per account, so if you have two plans for your child, the limit is $20,000.
Taxpayers must pay quarterly installments of their estimated tax in amounts figured by the regular installment method. When a taxpayer has a fluctuating income it often causes them to underpay on the quarterly estimates leading to underpayment penalties. Consider annualizing for quarterly estimates to decrease underpayment and penalties incurred due to fluctuating income.
Consider donating appreciated stock if you were planning to sell the stock and make charitable contributions instead of gifting cash to avoid paying tax on the gain. If you gift the stock directly to the charitable organization as opposed to selling the stock and donating the cash, you will avoid paying tax on the appreciated stock.
An excess business loss is the amount by which the total deductions from all trades or businesses exceed a taxpayer’s total gross income and gains from those trades or businesses, plus $250,000 ($500,000 for a joint return). Excess business losses that are disallowed are treated as a net operating loss (NOL) carryover to the following taxable year.
Most taxpayers no longer have the option to carryback a NOL. For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. For losses arising in taxable years beginning after Dec. 31, 2017, the new law limits the NOL deduction to 80% of taxable income.
As you prepare for the 2019 tax filing year, now is a good time to review the above changes, many of which went into effect in 2018 with the passing of the TCJA. You can avoid surprises this tax season by consulting with your tax professional to understand how you can reduce your liabilities by taking advantage of available credits and deductions that may apply to you.