In part 1, we covered changes to taxable income brackets and tax rates for individuals and married filing jointly. In part 2, we will cover deductions and other updates.
Changes to Standard Deduction Amounts
A standard deduction is the dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. At the beginning of 2018, the new tax plan brought higher standard deductions with the intention of helping families keep more of what they earn. Higher standard deductions often benefit middle-income families who see their income subject to lower tax rates.
This coming tax year, new standard deduction amounts will increase to: $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly and surviving spouses.
There are also a few specific standard deduction changes you need to know for 2019:
- Additional standard deduction amount for the aged or the blind: $1,300 (increases to $1,650 for unmarried taxpayers).
- The standard deduction for an individual claimed as a dependent by another taxpayer cannot exceed $1,100 OR the sum of $350+ the individual’s earned income, whichever is greater.
- There will be no personal exemption amount for 2019 per the Tax Cuts and Jobs Act.
- Alternative minimum tax (AMT) exemption amounts will be adjusted for inflation. The AMT exemption is a mandatory alternative to the standard income tax for taxpayers who make more than the exemption.
Updates to the Kiddie Tax
The Kiddie Tax is a tax law that was created in 1986 to regulate investment and unearned income tax for kids under the age of 17. Despite its cute name, this regulation is designed to close a loophole where parents would give their children large gifts of stock and avoid paying taxes on said “gift.” When Congress passed the Tax Cuts and Jobs Act in 2017, the Kiddie Tax changed dramatically. Now, if a child’s income exceeds a certain threshold set forth in the Kiddie Tax, a taxations structure applies. This structure dictates a tax rate on the amount of income earned separate from the tax rate of the child’s parents.
In 2019, the key change to the Kiddie Tax is that unearned income – income from sources other than a paycheck or salary – will be taxed according to the brackets which apply to estates and trusts. Dividends and interest get the same tax rates as can be found in the table below. For earned income, the rules have not changed. Please note that the Kiddie Tax applies to individuals under age 19 as well as college students under the age of 24.
Changes to Child Tax Credits
Parents will be relieved to know that the Child Tax Credit expanding in 2019. This credit gives parents a deduction of $2,000 per qualifying child (an individual who has not turned 17 during the taxable year). This credit is refundable up to $1,400. The TCJA also includes a temporary revision for a $500 nonrefundable credit for qualifying dependents other than qualifying children. To learn more about the specifics of the expanded CTC, read more here.
Schedule A Itemized Deductions
Itemized deductions are certain expenses that you may incur throughout the taxable year and you can claim against your tax return. If you qualify, you may be able to deduct some of these items from your adjusted gross income.
- Medical and dental expenses deduction: starting in 2019, you may only deduct medical and/or dental expenses which exceed 10% of your adjusted gross income. This is an increase from 7.5% in 2018.
- State tax deduction: there is a new limit of a combined total of $10,000 which you may deduct for state and local sales, income, and property taxes (or $5,000 for married taxpayers filing separately).
- Home mortgage interest deduction: you may only deduct interest on a mortgage used to buy, build, or improve your home up to $750,000 ($375,000 for married taxpayers filing separately).
- Charitable donation deduction: in 2018, the percent limit for charitable cash donations increased to 60%. The IRS is keeping the limit at 60% for 2019.
- Casualty and theft loss deduction: unfortunately, this deduction will be repealed for personal casualty and theft loss, except if your loss can be recorded in a federal disaster area.
- Job expenses, miscellaneous deductions: these had been subject to 2% floor but have been repealed for 2019. Prior to TCJA, employees could deduct business expenses that weren’t reimbursable by their employer as 2% miscellaneous itemized deductions if:
- they were incurred or paid in the tax year,
- if it allowed the taxpayer to carry on in their trade, and
- if the expenses were ordinary and necessary.
The job expenses and miscellaneous deductions which will no longer be allowed starting in 2019 include:
- Tax prep fees, unless you are able to allocate them under Schedule C, E, F
- Unreimbursed employee expenses, including: sales, travel, and entertainment expenses for outside salespeople, and entertainment industry expenses, including agent, attorney and publicist fees
- Home office for employees, union dues, out-of-pocket expenses, and uniforms- including police and fire, construction workers
- Continuing education expenses
- Investment advisor fees or asset management fees, and
- Attorney fees, among others
Tax Credit and Deduction 2019 Adjustments
There have been some popular changes that passed under the tax reform law that impact your taxes in 2019. Here are a few of the deductions and credits you may be able to take advantage of (in addition to the Child Tax Credit).
- Earned Income Tax Credit (EITC): maximum EITC amount is $6,557 for married taxpayers filing jointly with three or more qualifying children.
- Adoption Credit: allowable credit for the adoption of a child with special needs is $14,080. The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,810.
- Student Loan Interest Deduction: maximum deduction for interest paid on student loans is $2,500 (no change from 2018).
- Lifetime Learning Credit: joint filers seeking to receive a Lifetime Learning Credit must have an adjusted gross income amount of $116,000, up from $114,000 for 2018.
- Medical Savings Accounts: if you have self-only coverage in an MSA, and meet certain annual deductible limits, you may be able to take a tax deduction on your return. Click through to see if you qualify for a medical savings account deduction.
- Foreign Earned Income Exclusion: in 2019, the exclusion increases to $105,900, up from $103,900.
Last but not least, the shared individual responsibility payment has been eliminated for 2018. This provision was part of the Affordable Care Act and required taxpayers and dependents to have qualifying health care coverage (or an exemption) – or, make an individual shared responsibility payment on your federal income tax return.
Remember: these changes apply to your tax return due in 2020, not in April 2019. If you’re need a qualified tax preparer to prepare your 2018 tax returns, or would like more information on 2019 updates, get in touch with our experts to see how we can help.