It’s probably about time to start thinking about the 2019 income tax return especially if you want to do a bit of 1040 planning. You can also call Carol and make an appointment. She’d love to see you. And it would be even more informative and a lot less boring than reading this.
REINFORCING THE BASICS.
General information before you even get started: still no personal exemptions (through 2025); all three standard deductions increased: MFJ = $24,400 from $24,000; S and MFS = $12,200 from $12,000; and, HOH = $18,350 from $18,000. The additional standard deductions for being somewhat older (65) or blind = $1,650 if Single or HOH and $1,300 (each) if MFJ. The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot be more than the greater of $1,100 OR the sum of $350 and the individual’s earned income (not to exceed the regular standard deduction amount).
Income tax rates remained the same but the brackets increased considerably. Here are the increased 2019 brackets:
|Rate 2018-2025||Single $||HOH $||MFJ $||MFS $|
Planning Tip. Keep in mind that the various credits and deductions have different income eligibility amounts and thresholds. Postponing 2019 income like an employee bonus to 2020 and accelerating 2020 deductions to 2019, “the bunching strategy”, could possibly generate a tax benefit especially if you expect to be in a lower tax bracket in 2020. Keep in mind that you can pay deductible expenses on your credit card.
Retirement Contributions. How much can I contribute in 2019? For both Traditional and Roth IRAs, the MaxOut amount is $6,000 and add a $1,000 if you’re over age 50 and want to catch-up.
How much of my 2019 contribution is tax deductible? Roth IRA contributions are never tax deductible and the account grows tax-free as well.
For Traditional IRAs how much of the contribution being deductible is limited by how much you make and if you have a retirement plan through your employer. If you are not married yet, for better or for worse, and have a plan through work: the whole contribution is tax deductible if MAGI is less than $64,000; partly deductible between $64,000 and $74,000; and, not at all tax deductible if you make over $74,000; at which point you should consider contributing to a Roth IRA. For married folks those amounts are: $103,000 and $123,000. If your spouse has a plan through work and you don’t, the amounts are $193,000 and $203,000. If you are self-funding an IRA on your own then the entire contribution up to the maximum amount is fully deductible. We’ll be sure to let you know the MaxOut 2020 amounts.
Planning Tip. If you are contemplating converting a traditional IRA to a Roth IRA, it may be beneficial to convert beaten down stocks sitting in a Traditional IRA especially if there is no predicted rally or bounce back in 2020.
For 401Ks, 403Bs, most 457Bs, and the TSP the 2019 elective deferral amount is $19,000 and add $6,000 if you’re over age 50 and want to catch-up. The deductible amounts are the same as for Traditional IRAs.
Required Minimum Distribution (RMD). If you are older than 70-1/2 double check that you took the annual RMD from the IRA, 401K or employer plan. There is no need to pay a possible penalty that is 50% of the RMD.
Saver’s Credit. The maximum credit amount remains unchanged at $2,000.
|Credit Amount||MFJ AGI||HOH AGI||All Other AGI|
Education. American Opportunity Tax Credit. For 2019, the maximum American Opportunity Tax Credit is $2,500 per student, and is phased out beginning at $160,000 AGI for joint filers and $80,000 for S & HOH. Note MFS is still not eligible to claim this credit.
Lifetime Learning Credit. A credit of up to $2,000 per return is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2019, the Lifetime Learning Credit phases out between $116,001-$135,999 for MFJ and $58,0001-$67,999 for S & HOH. The credit cannot be claimed if your MAGI is $67,999 or more ($135,999 for joint returns) or if you file MFS.
Coverdell Education Savings Account. The maximum contributed amount remains unchanged at $2,000 and the contribution remains non-deductible. The Coverdell account can be used to offset the cost of elementary and secondary education in addition to post-secondary education. The phaseout is between $190,001-$219,999 MFJ and $95,001-$109,999 all other filers.
Employer-Provided Educational Assistance. The 2019 exclusion amount remains unchanged at $5,250.
Student Loan Interest. No change in 2019. Maximum deduction is $2,500 as long as your MAGI is less than $70,000 S or $140,000 MFJ. NOTE MFS is not eligible for his credit. The deduction is phased out at higher income levels.
Tax Credits. Adoption Credit. In 2019 a nonrefundable credit of up to $14,080 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit. The Child and Dependent Care Tax Credit was permanently extended a few years back and survived the TCJA. As such, 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.
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.
Child Tax Credit and Credit for Other Dependents. For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child. The refundable portion of the credit increases from $1,000 to $1,400 – 15 percent of earned income above $2,500, up to a maximum of $1,400 – so that even if taxpayers do not owe any tax, they can still claim the credit. Phaseout begins at MAGI of $400,000 MFJ and $200,00 for all other filers.
Under TCJA, a new tax credit – Credit for Other Dependents – is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.
Earned Income Tax Credit (EITC). For tax year 2019, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,557 (up from $6,431 in 2018). The maximum income limit for the EITC increased to $55,952 (up from $54,884 in 2018) for married filing jointly. 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.
Health. Health Savings Accounts. The maximum annual contribution for Individuals is $3,500; Families, $7,000 and catchup contribution an additional $1,000. Flexible Spending Arrangements. The voluntary employee salary reduction is $2,700.
Long-term Care (LTC) Insurance. The maximum LTC insurance premiums eligible for deductions by age group are:
|Under 40||41-50||51-60||61-70||Over 70|
Other. Long-term Capital Gains & Qualified Dividends Tax.
Planning Tip. If your taxable income (TI) is resting comfortably within one of the taxable income brackets above, accept the % rate and move on. It is not always advisable to sell for capital losses unless the offset moves TI into a lower percentage bracket.
Christmas Wish List. Gift Tax. You can be the best Santa Ever. The annual exclusion remains unchanged at $15,000. Cash, cars, jewelry, stocks (income-earning property).
Planning Tip. Overall tax liability can be reduced by gifting income-earning property to family members in lower tax brackets AND not subject to the kiddie tax.
Planning Tip. If you’re older than 70-1/2 and are charitable, consider making the donation straight from the IRA straight to the charity. This results in neither income nor a charitable deduction but most certainly reduces the amount of the RMD and may even result in tax savings.
WRAPPING IT UP.
WHAT ELSE SHOULD I KNOW?
→ Tax saving strategies employed this year may not be so tax saving next year.
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