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Deductions in Effect for 2019

The IRS recently issued the annual inflation adjustments for the 2019 tax season. The Tax Cuts and Jobs Act, which went into effect January 1, 2018, generally reduced the income tax brackets for most individuals. It is important to remember the calculations to determine the applicable tax bracket for each individual will further be affected by the increased standard deduction and the loss of personal exemptions under the Tax Cuts and Jobs Act. The tax items of the greatest interest to most taxpayers are as follows:

Tax Rates:

The 2019 tax rates are as follows:

  • 37 percent for individual single taxpayers with incomes greater than $510,300, or $612,350 for married couples filing jointly.
  • 35 percent, for incomes over $204,100 ($408,200 for married couples filing jointly);
  • 32 percent for incomes over $160,725 ($321,450 for married couples filing jointly);
  • 24 percent for incomes over $84,200 ($168,400 for married couples filing jointly);
  • 22 percent for incomes over $39,475 ($78,950 for married couples filing jointly);
  • 12 percent for incomes over $9,700 ($19,400 for married couples filing jointly); and
  • 10 percent for incomes of single individuals with incomes of $9,700 or less ($19,400 for married couples filing jointly).

The U.S. uses a progressive tax system, meaning individuals with higher taxable income pay higher federal income tax rates. It is important to note that once you are “in” a tax bracket does not mean you will pay that rate on your entire taxable income. Instead, your taxable income will be divided into portions – otherwise known as tax brackets – and each portion will be taxed at the corresponding tax rate. For an example, if a single individual has $25,000 of taxable income, that individual would pay 10% on the first $9,700 of taxable income, and 12% on the remaining taxable income over $9,700.

Standard Deduction:

  • The standard deduction for married filing jointly rises to $24,400 for the 2019 tax year. This is up $400 from the prior year.
  • For single taxpayers and married individuals filing separately, the standard deduction rises to $12,200 for 2019, a $200 increase from last year.
  • For heads of households, the standard deduction will be $18,350, an increase of $350 from last year.

Personal Exemption:

  • Similar to tax year 2018, the personal exemption for tax year 2019 remains at $0.00. This elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

Itemized Deductions:

  • For 2019, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act in 2018.

Alternative Minimum Tax:

  • The Alternative Minimum Tax exemption amount for tax year 2019 is $71,700 and begins to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption begins to phase out at $1,020,600). The 2018 exemption amount was $70,300 and began to phase out at $500,000 ($109,400 for married couples filing jointly and began to phase out at $1 million).

Earned Income Credit:

  • The tax year 2019 maximum Earned Income Credit amount is $6,557 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,431 for tax year 2018.

199A Deduction:

One of the most significant provisions in the Tax Cuts and Jobs Act was the implementation of the Section 199A deduction. Section 199A permits taxpayers to deduct up to 20% of qualified business income. However, there are limitations on this deduction, including limitations based on W-2 wages and/or capital. The deduction is available to individual owners of sole proprietorships, partnerships, or S corporations. The deduction also extends to an S corporation, partnership, or trust that owns an interest in a pass-through entity. It is not available to C corporations. The 199A deduction, while complex, provides a significant benefit to owners of flow-through entities. Having gone into effect on January 1, 2018, the upcoming tax season will see the first reported Section 199A deductions. It is important to contact your tax professional to determine whether you or your business may benefit from this new deduction.

Annual Exclusion for Gifts:

Annual gifting continues to be a worthwhile estate planning tool. For 2019, the annual exclusion is $15,000, as it was for tax year 2018. This means that individuals may make gifts to any person up to $15,000 without incurring any federal gift tax liability or using any of their applicable credit amount available for gift and estate tax purposes.

Husbands and wives may decide to “gift split” and, in such circumstances, the amount of these gifts may double. Since this may be done each year, annual gifting can result in the transfer of significant value without any federal gift tax being imposed. Additionally, annual gifting further reduces an individual’s taxable estate, thereby lessening any potential estate tax that may be incurred upon death.

Estate Tax:

Estates of decedents who die during 2019 have a lifetime exemption amount of $11,400,000, up from a total of $11,180,000 for estates of decedents who died in 2018. This means that decedents may leave an estate up to $11.4 million without incurring any federal estate tax liability. Through a concept known as portability, any unused exemption amount may be transferred to a decedent’s surviving spouse, to be used in conjunction with the surviving spouse’s own lifetime exemption amount.

When the Tax Cuts and Jobs Act went into effect, it essentially doubled the lifetime exemption amounts for estate and gift tax. Prior to its enactment on January 1, 2018, the lifetime exemption amount was $5.49 million per individual for tax year 2017. The doubled exemption amount under the Tax Cuts and Jobs Act is set to sunset in 2025. High net worth individuals should take action now to ensure they take full advantage of these record-high exemption amounts.

Tax Planning:

Tax planning is best done throughout the year and it is best to start planning as soon as possible. Your tax professionals will progressively become “too busy” as we progress through the first quarter of the year with the looming mid-April tax deadline on the horizon. So, getting on your advisor’s calendars for a meeting early in the first quarter of the year is key. Once mid-April passes it is important to have a team meeting of your advisors to make sure you are on the right track to maximizing whatever benefits are available to you to reduce your tax burden. If you have a planning structure in place, it is imperative that all of your advisors are on the same page with respect to those portions of the tax code which apply to your structure and what needs to be done during the year to take advantage of your structure.