Keeping up with the constantly changing tax laws can help you get the most benefit out of the laws and minimize your taxes. Many tax parameters, such as the standard deduction, contributions to retirement plans, and tax rates, are annually inflation-adjusted, while some tax changes are delayed and take effect in future years. On top of all that, we have Congress considering the retroactive extension of some tax provisions that expired after 2017 as well as proposing new tax legislation. The inflation adjustments shown are not the only items adjusted for inflation. For a full list, see IRS Revenue Procedure 2018-57.
The following outlines some changes that might affect your 2019 return.
Although the solar credit remains at 30% for 2019, as a reminder, the credit rate will drop to 26% in 2020. This means that for each $1,000 spent on qualified solar property, the credit will be $40 less in 2020 than if the expense were paid and the credit was claimed in 2019. However, this is a non-refundable credit, meaning it can only offset your tax liability, but the unused credit can carry over to a future tax year if the credit is allowed; it is currently scheduled to end after 2021. So, be cautious of overzealous salespeople trying to talk you into an expenditure for which you may not get the full credit.
Plug-In Electric Vehicle Credit
Although the credit amounts have not changed, the credit begins to phase-out for each manufacturer after it produces its 200,000th qualifying vehicle. For example, the very popular Tesla vehicle did qualify for the full credit in 2018. However, Tesla has entered the phase-out stage, and for 2019, the credit is only $3,750 for purchases in the first 6 months of the year, then drops to $1,875 for vehicles bought through the rest of 2019, and is zero for post-2019 purchases. If you are contemplating buying a plug-in electric vehicle, check the IRS website for the current credit by the manufacturer.
Penalty for Not Being Insured
The Affordable Care Act required individuals to have health insurance and imposed a “shared responsibility payment” – really a penalty – for those who didn’t comply. The penalty could have been as much as $2,085 for most families. That penalty will no longer apply in 2019 or the foreseeable future.
Medical Deductions Further Restricted
Unreimbursed medical expenses are allowed as an itemized deduction to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). As part the Affordable Care Act, Congress increased that percentage from 7.5% to 10%. That increase was temporarily rescinded in the most recent tax form. However, starting with the 2019 returns and for the foreseeable years, the AGI medical floor will be 10% of AGI.
This is where the “bunching” strategy may benefit your ability to deduct medical expenses. This means paying as much of your medical expenses as possible in a single year so that the total will exceed the AGI floor and your overall itemized deductions will exceed the standard deduction.
Example: Your child is having orthodontic work done, which will cost a total of $12,000, and the dentist offers a payment plan. If you pay in installments, you will spread the payments out over several years and may not exceed the medical AGI floor in any given year. However, by paying all at once, you will exceed the floor and get a medical deduction.
New Alimony Rules
For divorces and separation agreements entered into after 2018, the alimony paid is not deductible, and the alimony received is not taxable. In addition, the alimony recipient can no longer make an IRA contribution based on the alimony received.
It is important to understand that this treatment of alimony only applies to alimony payments paid under agreements entered into after 2018 or under prior agreements modified after 2018 that include this new provision. For agreements entered into before 2019 that haven’t been modified, the old rules continue to apply: the alimony paid is deductible, and the alimony received is included in income. Also, an IRA deduction can be made based upon the taxable alimony received.
The standard deduction, which is inflation-adjusted annually, is used by taxpayers who do not have enough deductions to itemize. For 2019, the standard deductions have increased as follows:
- Single: $12,200 (up from $12,000 in 2018)
- Married filing jointly: $24,400 (up from $24,000 in 2018)
- Married filing separately: $12,200 (up from $12,000 in 2018)
- Head of household: $18,350 (up from $18,000 in 2018)
Individuals who are blind and/or age 65 or over are allowed standard deduction add-ons. These add-ons are for the taxpayer and spouse but not for dependents. The add-on amounts are $1,300 for those filing jointly (unchanged from 2018) and $1,650 for all others (up from $1,600 in 2018).
Increased Retirement Contributions
All IRA and retirement contributions are subject to an inflation adjustment, meaning the allowable amounts may be increased each year. This gives you the opportunity to increase your retirement savings in 2019.
Simplified Employee Pension (SEP) Plans: The maximum amount for 2019 is $56,000 (up from $55,000 in 2018).
Individual Retirement Accounts (IRAs): For both traditional and Roth IRAs, the maximum contribution has been increased to $6,000 (up from $5,500 in 2018). This is the first change to IRAs since 2013. The additional amount taxpayers age 50 and over can contribute remains unchanged at $1,000.
401(k) Plans: The maximum employee contribution has been increased to $19,000 (up from $18,500 last year). The additional amount for taxpayers who’ve reached age 50 remains unchanged at $6,000.
Simple Plans: The maximum elective contribution is $13,000 (up from $12,500 in 2018). The additional amount for taxpayers age 50 and older remains unchanged at $3,000.
Health Savings Accounts (HSAs): Although meant to be a way for individuals covered by a high-deductible health plan to save money for future medical expenses, these plans can also be used as a supplemental retirement plan. Contributions are deductible, earnings accumulate tax-free, and if distributions are used for qualified medical expenses, they are tax-free. However, when used as a supplemental retirement plan, the distributions would be taxable. The following are the contribution limits for 2019:
- Self-only coverage: $3,500 (up from $3,450 last year)
- Family coverage: $7,000 (up from $6,900)
Federal Tax Brackets
The tax brackets were inflation-adjusted (by approximately 2% over the 2018 brackets), meaning more of your income is taxed at a lower bracket in 2019 than it was in 2018. As an example, here are the brackets for 2019 for taxpayers using the single filing status:
- 10%: $9,700 or less
- 12%: More than $9,700 but not more than $39,475
- 22%: More than $39,475 but not more than $84,200
- 24%: More than $84,200 but not more than $160,725
- 32%: More than $160,725 but not more than $204,100
- 35%: More than $204,100 but not more than $510,300
- 37%: Applies to taxable incomes of more than $510,300
These are the brackets for married taxpayers filing jointly:
- 10%: $19,400 or less
- 12%: More than $19,400 but not more than $78,950
- 22%: More than $78,950 but not more than $168,400
- 24%: More than $168,400 but not more than $321,450
- 32%: More than $321,450 but not more than $408,200
- 35%: More than $408,200 but not more than $612,350
- 37%: Applies to taxable incomes of more than $612,350
For other filing statuses, see Revenue Procedure 2018-57.
Note: These are step functions, so for example, the first $9,700 of taxable income is taxed at 10%, the next $29,775 ($39,475 − $9,700) is taxed at 12%, and so forth.