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Significant Tax Changes for Individuals and Businesses in 2019

Tax change typically happens at the turn of the year, and 2019 will be no different. Many of the tax provisions compatible to the Tax Cuts and Jobs Act of 2017 (TCJA) are in full effect. Here is a list of tax changes to help you plan for this coming year.

Individuals

Adjustments for inflation have affected many tax provisions in 2019, including Health Savings Accounts, retirement contribution limits, and foreign earned income exclusion. Many other provisions have been revised or eliminated due to the TCJA.

The tax rate structure has remained similar to that of 2018. There are still seven tax brackets, though the tax bracket thresholds have increased significantly for each filing status. The standard deductions will increase significantly as well. Remember that personal exemptions have been eliminated through the tax year 2025.

Standard Deduction

The standard deduction has increased for individuals from $12,000 in 2018 to $12,200 in 2019 and from $24,000 in 2018 to $24,400 in 2019 for married couples.

Alternative Minimum Tax (AMT)

The AMT exemption amounts have increased for individuals from $70,300 in 2018 to $71,700 in 2019, and for marriage couples filing jointly from $109,400 in 2018 to $111,700 in 2019. The phaseout threshold has increased for individuals to $510,300 and to $1,020,600 for married couples. Both the exemption and threshold amounts have been inflation-indexed.

Kiddie Tax

The amount of money subject to kiddie tax that can be used to reduce net unearned income on a child’s return has been raised to $1,100. This amount is also utilized in determining whether a parent is able to calculate the kiddie tax by using their child’s gross income in their own gross income calculation. The child’s gross income for 2019 must be more than $1,100 and less than $11,000.

Health Savings Accounts (HSAs)

Any contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the owner of the account, his or her spouse, or any qualified dependent. These medical expenses do not qualify reimbursement from any source and do not qualify for medical expense deduction on their income tax return.

To qualify for an HSA, an individual must be covered by a High Deductible Health Plan (HDHP) and no other health insurance, except insurance for accidents, disability, dental care, long-term care, or vision care.

A qualifying HDHP in 2019 must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage, unchanged from 2018. Out-of-pocket expenses must be limited to $6,750 for self-only and $13,500 for family annually.

Medical Savings Accounts (MSAs)

The two types of Medical Savings Accounts (MSAs) both require that you are enrolled in a HDHP. The two types of MSA are the Archer MSA and the Medicare Advantage MSA. The Archer MSA is designed to assist self-employed individuals and employees of certain small employers, while the Medicare Advantage MSA is used to pay the qualified medical expenses of a person enrolled in Medicare.

Self-Only Coverage

For self only coverage, the term “High deductible health plan” is a health plan with an annual deductible above $2,350 (up $50 from 2018) and below $3,500 (up $50 from 2018). The annual out-of-pocket expenses that are required to be paid for covered benefits (other than premiums) must not exceed $4,600 (up $100 from 2018).

Family Coverage

For family coverage, the term “high deductible health plan” means a health plan that has an annual deductible more than $4,600 and less than $6,850 (up $100 from 2018). The annual out-of-pocket expenses that are required to be paid for covered benefits (other than premiums) must not exceed $8,550 (up $150 from 2018).

Eliminated Penalty for Not Maintaining Minimum Essential Health Coverage

Under the TCJA starting in 2019, the penalty has been removed for not maintaining minimum essential health coverage.

AGI Limit for Deductible Medical Expenses

The deduction threshold for deductible medical expenses in 2019 is 10 percent of adjusted gross income (AGI).

Eligible Long-Term Care Premiums

Long-term care premiums and health care premiums are both deductible on your taxes, subject to certain limitations. Individuals 40 years old or under can deduct $420. People from ages 41 to 50 can deduct $790. People from ages 51 to 60 can deduct $1,580. People from ages 61 to 70 can deduct $4,220. People over the age of 70 can deduct the maximum deduction of $5,270.

Medicare Taxes

A 0.9 percent addition to the Medicare tax on wages above $200,000 for individuals or $250,000 for married filing jointly went into effect in 2013 and remains in effect for 2019. Also remaining in effect is the Medicare tax of 3.8 percent on investment unearned income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 for single and $250,000 for joint filers. The investment income includes anything gained from the disposition of a property and certain passive activity income. Estates, trusts, and self-employed individuals are liable for the new tax.

Foreign Earned Income Exclusion

The foreign earned income exclusion amount for 2019 is $105,900 (up $2,000 from 2018).

Long Term Capital Gains and Dividends

Tax rates on capital gains and dividends remain the same for 2019 as the 2018 rates. These rates are 0, 15, and a top rate of 20 percent, though the threshold amounts do not correspond to the new tax bracket structure like they did in the past. For taxpayers who make up to $39,375. individually or $78,750 for married filing jointly, the rate remains 0 percent. The threshold amounts are $38,600 for individuals and $77,200 for married filing jointly. For those in the middle tax brackets, making between $39,375 and $434,550 individually or $78,740 to $288,850 for married filing jointly, the rate is 15 percent. For those in the highest tax bracket with an income of $434,550 or more individually or $479,000 or more married filing jointly, the rate is capped at 20 percent.

Estate and Gift Taxes

For an estate of any decedent, the basic exclusion amount is now $11.4 million (up $2,200,000 from 2018). The annual exclusion for gifts has remained at $15,000. The maximum tax rates remain unchanged at 40 percent.

Tax Credits for Individuals

Adoption Credit
For people with a tax liability, a non-refundable credit of up to $14,080 is available on eligible expenses from adoption for every qualified child in 2019.

Earned Income Tax Credit

The maximum earned income tax credit (EITC) for low and moderate-income workers and families in tax year 2019 is $6,557 (up $126 from 2018.) EITC varies, and is influenced by family size, filing status, and other factors. Joint filers with three or more qualifying children will receive the maximum credit.

Child Tax Credits

The passage of TCJA has increased the child tax credit to $2,000 per child for tax years 2018 through 2025. The refundable credit remains $1,400, while a nonrefundable credit of $500 is available for dependents who are not qualified for the child tax credit, such as dependents age 17 or older.

Child and Dependent Care Credit

The Child and Dependent Care Credit remains under 2019 tax reform. If you employ someone to take care of your dependent so that you may work or look for work, you may qualify for a credit of up to $1,050, or for two or more qualifying dependents, $2100.

These credits are based off of percentages of eligible expenses in 2019, such as 35 percent of $3,000 of eligible expenses for one dependent and 35 percent of $6,000 for two dependents. For those who receive a higher income, the credit percentage is lowered, but with a minimum of 20 percent. The tax credit is nonrefundable. Dependents are defined as being under the age of 13 at the end of the 2019 tax year or as being incapable of self-care.

Individuals- Education

American Opportunity Tax Credit and Lifetime Learning Credits

For students, the maximum credit is $2,500 under the American Opportunity Tax Credit. The Lifetime Learning Credit does not change, remaining at $2,000 per return, though the Lifetime Learning Credit has been adjusted for gross income amount used by joint filers, and is now $116,000 (up $2,000 from 2018).

Interest on Educational Loans

There is a $2,500 maximum deduction for interest paid on student loans in 2019. The deduction is beginning to be phased out for higher-income taxpayers whose modified AGI is more than $70,000 for single filers or $140,000 for joint filers. The deduction is completely eliminated for taxpayers with a modified AGI of $85,000 for individuals or $170,000 for married filing jointly.

Individuals- Retirement

Contribution Limits

The elective deferral, also known as the contribution limit, has increased to $19,000 for taxpayers who participate in any 401(k), 403(b), most 457 plans, or the Thrift Savings Plan. The limit for SIMPLE plans increases to $13,000 (up $500 from 2018.)  The maximum compensation, used to determine contributions, has increased to $280,000 (up $5,000 from 2018).

Income Phase-out Ranges

Deductions are phased out for singles and heads of households who make contributions to a traditional IRA, are covered by an employer sponsored retirement plan and have a modified AGI between $64,000 and $74,000 (up $1,000 from 2018).

They are also phased out for IRA contributors who are not covered by an employer-sponsored retirement plan and whose spouse is covered. The deductions are phased out if the couple’s modified AGI is between $193,000 and $203,000 (Up $4,000 from 2018).

The phase-out range increases to $101,000 to $121,000 (up $2,000 from 2018) for married couples filing jointly, in which the spouse who makes IRA contributions is covered by an employee-sponsored retirement plan.

The modified AGI phase-out range for singles and heads of household making contributions to a Roth IRA is $122,000 to $137,000 (up $2,000 from 2018). For married couples filing jointly, the range is 193,000 to $203,000 (up $4,000 from 2018).

For married individuals filing separately and making contributions to a Roth IRA, the phase-out range continues to be $0 to $10,000.

Saver’s Credit

The AGI limit for the saver’s credit, otherwise known as the retirement savings contribution credit, has increased for all taxpayers. The limit is $64,000 for married couples filing jointly (up $1,000 from 2018), $48,000 for heads of household (up $750 from 2018), and $32,000 for singles and married individuals filing separately (up $500 from 2018).

Businesses

Standard Mileage Rates

The 2019 rates for business miles driven is 58 cents per mile (up 3.5 cents from 2018).

Section 179 Expensing

The Section 179 expense deduction in 2019 has increased to a maximum deduction $1,020,000 of the first $2,550,000 of qualifying equipment placed in service during the current tax year. Under TCJA, the Section 179 expense deduction was enhanced. The deduction now includes improvements to nonresidential qualified real property, including things such as roofs, safety systems, and air temperature and quality systems. Please also note that costs associated with the purchase of any sport utility vehicle cannot exceed $25,500. This is treated as a Section 179 expense.

Bonus Depreciation

Businesses may immediately deduct 100 percent of the cost of eligible property placed into service from dates September 28, 2017 to January 1, 2023. After these dates, the property will be phased downward throughout a four-year period. The deductions will be 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026 and 0% after 2027.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit has been extended through 2019 and enhanced for employers who hire individuals who have been unemployed for 27 weeks or more. This is about 40 percent of the first $6,000 in wages paid to a new hire.

Qualified Business Income Deduction

Eligible Taxpayers may deduct up to 20 percent of certain business income and certain dividends from qualified domestic businesses. To qualify for this deduction, business income must  not exceed $160,700 for individual filers and $321,400 for married filing jointly.

Research & Development Tax Credit

Starting in 2018, businesses with under $50 million in gross receipts may use the Research & Development tax credit to counterbalance the alternative minimum tax. Qualifying start-up businesses that may not have income tax liability may also use the credit to offset payroll taxes.

Employee Health Insurance Expenses

The dollar amount of average wages for taxable years beginning in 2019 is $27,100 (up $500 from 2018). This dollar amount is used to limit the small employer health insurance credit. It is also used to determine eligible small employers eligible for the credit.

Business Meals and Entertainment Expenses

For taxpayers incurring food and beverage expenses in association with operating a trade or business, the deduction will remain at 50 percent. This 50 percent deduction expands in tax years 2018 through 2025 in order to include expenses incurred for meals supplied to employees. After 2025, amounts will not be deducted for this.

Under the TCJA, office holiday parties will remain 100 percent deductible for 2019. Employee meals while on business travel will remain at a 50 percent deduction.

The deduction for business entertainment expenses is eliminated. Receipts must identify and separate meal costs from entertainment costs.

Employer-Provided Transportation Fringe Benefits

For businesses that provide transportation fringe benefits to their employees, the maximum monthly limit is $265 for commuter highway vehicles, transit passes and qualified parking.

Though this checklist outlines all important tax changes for the tax year 2019, there is always a possibility that tax law changes will arise during the year. Please call our office if you have questions or would like to begin tax planning for 2019.