2019 Tax Planning - 9 Areas to Think About
Here are 9 things to know about the recent tax law changes. While you can't do much about your 2018 taxes now, it's a good time to start thinking about your 2019 taxes. This is especially true if you live in coastal areas where state income taxes and home prices are high and particularly if you own one or more homes.
As always, your own tax situation will be unique and you should consult with your tax adviser.
1) Standard deduction - doesn't matter if you itemize, but helps those that have simple tax situations
Increased to $12,000 for single or married filing separately, $24,000 married filing jointly
Increased to $18,000 for Head of Household
65 and over, blind, or disabled will get an additional standard deduction
2) Families - loss of dependent exemption offsets lower tax bracket savings
Dependent exemption of $4,050 is eliminated
Child Tax Credit doubles to $2,000
Adds $500 credit for other types of dependents
3) Home mortgages - pay attention to these, especially if you own a home or have a second home
Mortgage interest paid on new loans deductible up to $750,000 (or existing loans up to $1,000,000) - this is a significant change since it includes all residential loans, including your primary and secondary home; if you are thinking of buying or refinancing a new or second home this year, you'll need to do the math on a potential loss of tax deduction benefit if the loans will exceed $750,000
Interest paid on home equity loan or home equity line is limited to building and improving your home - this is also a significant change, since previously you could use deductible home equity line of credit to pay off non-deductible credit cards or other personal loans
If your home equity line and the first mortgage on your primary (and if applicable secondary) home exceed $750,000, the interest paid in the excess is not deductible!
Here are some more details:
For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.
The following examples illustrate these points.
Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.
4) Tax rates & brackets - loss of dependent exemptions and deductions for some will offset the benefit of the lower rates
Most taxpayers will see lower rates
Highest rate drops from 39.6% to 37%
5) State & local taxes - pay attention to this if you live in a high tax state like California or New York
State and local property, income, and sales taxes limited to $10,000 - this is a major change and will impact people who live in high tax states like California or New York (although if you were in an Alternative Minimum Tax situation already, the impact may not be as significant since state income and property taxes are not deductible for AMT purposes)
No income tax prepayment for 2019 allowed
6) 1040 form
New 1040 form with six new schedules
Eliminates 1040EZ and 1040A versions - this will make tax compliance more difficult for people with very simple tax situations and may require more people to get a professional to do their taxes
7) Alternative Minimum Tax
Raises the income cap so that less people are impacted, which is significant since unlike the ordinary tax schedule, alternative minimum tax is not "indexed" to inflation so it gets worse every year unless the tax law adjusts the exemption
Single taxpayers raised exempted income from $54,300 to $70,300
Married filing jointly raised exempted income from $84,500 to $109,400
8) Self-Employed
New 20% Qualified Business Income Deduction, which is a big boost for small business owners:
Section 199A of the Internal Revenue Code provides many taxpayers a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity.
The deduction has two components.
1) Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
2) Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.
The sum of these two amounts is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain. The deduction is available for taxable years beginning after Dec. 31, 2017. Most eligible taxpayers will be able to claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
Qualified business equipment can be deducted up to $1,000,000 - this almost doubles the prior "Section 179" deduction that was previously allowed to expense the purchase of new business equipment in the first year (vs having to depreciate over many years) and is also a big boost for small business owners
Potentially a greater business auto depreciation deduction
9) Healthcare
Eliminates tax penalty for not having health insurance (starting in 2019) - this is a nice change
Lowers floor on out-of-pocket medical expenses to 7.5% for 2017 & 2018; probably not a big deal unless you have a lot of medical expenses and don't have a high income
In closing, now is a good time to be thinking about the new tax law changes and how they will impact you in 2019. It's never too early to start planning!
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