Important Tax Changes for Individuals
By: Tax Hotline
Winter 2019 (Vol. 36, No. 4)
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. Personal exemptions have been eliminated through tax year 2025.
The standard deduction increases to $12,200 for individuals and to $24,400 for married couples.
The AMT exemption amounts increase to $71,700 for individuals and $111,700 for married couples filing jointly. The phase-out threshold increases to $510,300 ($1,020,600 for married filing jointly).
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.”
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 except for insurance for accidents, disability, dental care, vision care, or long-term care.
For 2019, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,750 for self-only coverage and $13,500 for family coverage.
There are two types of Medical Savings Accounts (MSAs): the Archer MSA for self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is designated by Medicare to be used solely to pay the qualified medical expenses of the Medicare account holder. Both MSAs require that you are enrolled in a HDHP.
In 2019, the term “high deductible health plan” for self-only coverage is defined as 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 for covered benefits do not exceed $4,650.
For family coverage, the term “high deductible health plan” means, 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 for covered benefits do not exceed $8,550.
Starting in 2019, there is no penalty for not maintaining minimum essential health coverage. The deduction threshold for deductible medical expenses is 10 percent of adjusted gross income (AGI).
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.
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). The foreign earned income exclusion amount is $105,900.
Tax rates on capital gains and dividends remain the same (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).
For estate taxes, 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. An adoption credit of up to $14,080 is available for qualified adoption expenses for each eligible child.
The maximum Earned Income Tax Credit (EITC) for low and moderate-income workers and working families rises to $6,557. 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.
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).
The Child and Dependent Care Tax Credit also remains. 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.
The American Opportunity Tax Credit is $2,500 per student. 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).
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 eliminated for taxpayers with modified adjusted gross income of $85,000 ($170,000 joint filers).
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).
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.
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.