Important Tax Changes for Individuals and Businesses
Every year, it's a sure bet that there will be changes to current tax law and this year is no different, now that the tax provisions under the Tax Cuts and Jobs Act of 2017 (TCJA) are in full effect. From standard deductions to health savings accounts and tax rate schedules, here's a checklist of tax changes to help you plan the year ahead.
In 2019, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion.
The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2018; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise. As a reminder, personal exemptions have been eliminated through tax year 2025.
Standard Deduction In 2019, the standard deduction increases to $12,200 for individuals (up from $12,000 in 2018) and to $24,400 for married couples (up from $24,000 in 2018).
Alternative Minimum Tax (AMT) In 2019, AMT exemption amounts increase to $71,700 for individuals (up from $70,300 in 2018) and $111,700 for married couples filing jointly (up from $109,400 in 2018). Also, the phaseout threshold increases to $510,300 ($1,020,600 for married filing jointly). Both the exemption and threshold amounts are indexed annually for inflation.
"Kiddie Tax" For taxable years beginning in 2019, the amount that can be used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $1,100. The same $1,100 amount is used to determine whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax." For example, one of the requirements for the parental election is that a child's gross income for 2019 must be more than $1,100 but less than $11,000.
Health Savings Accounts (HSAs) Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2019, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage (same as 2018) or $2,700 for family coverage (same as 2018) and must limit annual out-of-pocket expenses of the beneficiary to $6,750 for self-only coverage and $13,500 for family coverage.
Medical Savings Accounts (MSAs) There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP).
Self-only coverage. For taxable years beginning in 2019, the term "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,350 and not more than $3,500, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,650.
Family coverage. For taxable years beginning in 2019, the term "high deductible health plan" means, for family coverage, a health plan that has an annual deductible that is not less than $4,650 and not more than $7,000, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,550.
No Penalty for not Maintaining Minimum Essential Health Coverage
Starting in 2019, there is no penalty for not maintaining minimum essential health coverage.
AGI Limit for Deductible Medical Expenses
n 2019, the deduction threshold for deductible medical expenses is 10 percent of adjusted gross income (AGI).
Eligible Long-Term Care Premiums Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2019, the limitation is $420. Persons more than 40 but not more than 50 can deduct $790. Those more than 50 but not more than 60 can deduct $1,580 while individuals more than 60 but not more than 70 can deduct $4,220. The maximum deduction is $5,270 and applies to anyone more than 70 years of age.
Medicare Taxes The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2019, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax.
Foreign Earned Income Exclusion For 2019, the foreign earned income exclusion amount is $105,900, up from $103,900 in 2018.
Long-Term Capital Gains and Dividends In 2019 tax rates on capital gains and dividends remain the same as 2018 rates (0%, 15%, and a top rate of 20%); however threshold amounts have increased: the maximum zero percent rate amounts are $39,375 for individuals and $78,750 for married filing jointly. For an individual taxpayer whose income is at or above $434,550 ($488,850 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $39,375 and below $434,550 for single filers).
Estate and Gift Taxes For an estate of any decedent during calendar year 2019, the basic exclusion amount is $11.4 million, indexed for inflation (up from $11.18 million in 2018). The maximum tax rate remains at 40 percent. The annual exclusion for gifts remains at $15,000.
Individuals - Tax Credits
In 2019, a non-refundable (only those individuals with tax liability will benefit) credit of up to $14,080 is available for qualified adoption expenses for each eligible child.
Earned Income Tax Credit For tax year 2019, the maximum Earned Income Tax Credit (EITC) for low and moderate income workers and working families rises to $6,557, up from $6,431 in 2018. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credit For tax years 2018 through 2025, the child tax credit is $2,000 per child. The refundable portion of the credit is $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older).
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit also remained under tax reform. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2019. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.
Individuals - Education
American Opportunity Tax Credit and Lifetime Learning Credits The maximum credit is $2,500 per student for the American Opportunity Tax Credit. The Lifetime Learning Credit remains at $2,000 per return; however, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $116,000 ($58,000 single filers).
Interest on Educational Loans In 2019, the maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $70,000 ($140,000 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $85,000 ($170,000 joint filers).
Individuals - Retirement
Contribution Limits The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan increases to $19,000. Contribution limits for SIMPLE plans increase to $13,000 (up from $12,500 in 2018). The maximum compensation used to determine contributions increases to $280,000 (up from $275,000 in 2018).
Income Phase-out Ranges The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $64,000 and $74,000.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $103,000 to $123,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple's modified AGI is between $193,000 and $203,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000. For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Saver's Credit In 2019, the AGI limit for the Saver's Credit (also known as the Retirement Savings Contribution Credit) for low and moderate income workers is $64,000 for married couples filing jointly, up from $63,000 in 2018; $48,000 for heads of household, up from $47,250; and $32,000 for singles and married individuals filing separately, up from $31,500 in 2018.
Standard Mileage Rates In 2019, the rate for business miles driven is 58 cents per mile, up from 54.5 cents per mile in 2018.
Section 179 Expensing In 2019, the Section 179 expense deduction increases to a maximum deduction of $1,020,000 of the first $2,550,000 of qualifying equipment placed in service during the current tax year. This amount is indexed to inflation for tax years after 2018. The deduction was enhanced under the TCJA to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems. Also of note is that costs associated with the purchase of any sport utility vehicle, treated as a Section 179 expense, cannot exceed $25,500.
Bonus Depreciation Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and years beyond.
Work Opportunity Tax Credit (WOTC) Extended through 2019, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.
Qualified Business Income Deduction
Eligible taxpayers are able to deduct up to 20 percent of certain business income from qualified domestic businesses, as well as certain dividends. To qualify for the deduction business income must not exceed a certain dollar amount. In 2019, these threshold amounts are $160,700 for single and head of household filers and $321,400 for married taxpayers filing joint returns.
Research & Development Tax Credit
Starting in 2018, businesses with less than $50 million in gross receipts are able to use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well.
Employee Health Insurance Expenses
For taxable years beginning in 2019, the dollar amount of average wages is $27,100 ($26,600 in 2018). This amount is used for limiting the small employer health insurance credit and for determining who is an eligible small employer for purposes of the credit.
Business Meals and Entertainment Expenses
The deduction remains at 50% for taxpayers who incur food and beverage expenses associated with operating a trade or business. For tax years 2018 through 2025, however, the 50% deduction expands to include expenses incurred for meals furnished to employees for the convenience of the employer. Amounts after 2025, however, will not be deductible. Office holiday parties remain 100% deductible and employee meals while on business travel also remain deductible at 50%. Also eliminated is the deduction for business entertainment expenses (only meals are deductible at 50%; receipts must identify and separate out meal costs from entertainment costs).
Employer-provided Transportation Fringe Benefits If you provide transportation fringe benefits to your employees in 2019, the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $265. The monthly limitation for qualified parking is $265.