It’s not too early to start tax planning for 2019. While changes from the Tax Cuts and Jobs Act dominate the subject of new tax rules for individuals and businesses, there are still other considerations afoot that affect 2019 tax planning. Some tax rules have yet to be settled for 2019. Here is a roundup of what information you can use now to plan ahead as well as what could change to impact tax planning for the future.
Unsettled Tax Matters
The mid-term election gave the majority of the House to Democrats while Republicans kept control of the Senate. A divided Congress doesn’t bode well for a resolution of the following unsettled tax matters:
Expired tax rules. A number of tax provisions for individuals and businesses expired at the end of 2017. Some or all of them could be extended retroactively (recall that provisions that expired at the end of 2016 were not extended for 2017 until February 2018). If extended, it’s unclear whether this will only be for one year (2018) or will apply to 2019 as well. What’s more, there are some provisions set to expire at the end of 2018 (e.g., the 7.5 percent-of-adjusted-gross-income floor for itemized medical deductions) and at the end of 2019 (e.g., work opportunity credit). It’s unclear what will happen to these tax rules.
Tax reform 2.0. The House has been moving forward on enacting more tax changes, primarily benefiting the middle class and small businesses. More specifically, the House Ways and Means Committee has approved:
• Protecting Family and Small Business Tax Cuts Act (H.R. 6760)
• Family Savings Act (H.R. 6757)
• American Innovation Act (H.R. 6756)
With the change in leadership in the House, further action on these measures could die or completely change direction.
Technical corrections. A number of aspects in the Tax Cuts and Jobs Act need fixes. For example, it was clearly Congress’ intention to create a 15-year recovery period for qualified improvement property but because this language was not included in the law there is a 39-year recovery period. Whether technical corrections will happen and when is unclear.
Each year the IRS is required to release cost-of-living adjustments to various tax items as prescribed by law. Under the Tax Cuts and Jobs Act, this is now done using chained CPI-U. The IRS had not yet announced official COLA figures for many provisions, but based on the chained CPI-U index, it’s certain that the tax brackets will be adjusted.
Standard deductions. The deduction amounts for 2019 likely will increase to $24,400 for joint filers and surviving spouses, $18,350 for heads of households, and $12,200 for unmarried individuals and married persons filing separately (up from $24,000, $18,000, and $12,000, respectively, over 2018 amounts).
Tax credits. The adoption credit likely will increase to $14,080 (up from $13,840 in 2018). The earned income tax credit amounts will also probably be increased.
Social Security taxes. The wage base for the Social Security tax portion of FICA and self-employment tax for 2019 is $132,900 (up from $128,400 in 2018) (SSA Fact Sheet). The tax rate remains unchanged at 6.2 percent for the Social Security portion and 1.45 percent for the Medicare portion; the rates are double for self-employment tax.
What is not changed are the modified adjusted gross income thresholds used for the additional 0.9 percent Medicare tax on earned income and 3.8 percent additional Medicare tax on net investment income.
Qualified retirement plans and IRAs. The IRS has announced adjustments for contributions to 401(k), SEPs, and other qualified plans as well as to IRAs and Roth IRAs, along with other key retirement savings items (Notice 2018-83). Most limits have increased; some remain unchanged.
• Contribution limits. The contribution basic limits for IRAs for 2019 is increased to $6,000 (the first change since the limit was set at $5,500 in 2013). The $1,000 catch-up contribution for those age 50 and older by year-end remains is unchanged. The 401(k) elective deferrals from salary are limited to $19,000 ($500 more than in 2018); the catch-up contribution remains at $6,000. The elective deferrals to SIMPLE plans also increase to $13,000 (also a $500 increase), with a catch-up amount unchanged at $3,000. The overall 2019 limit on employee and employer contributions to a defined contribution plan (such as a profit-sharing plan and SEPs) increases to $56,000 (up from $55,000 in 2018). The general limitation on annual benefits from a defined benefit pension plan is $225,000 (up from $220,000 in 2018). In figuring contributions and benefits, only income up to a ceiling can be taken into account. The maximum amount of compensation for 2019 purposes increases to $280,000 (up from $275,000 in 2018).
• Income limits for IRA contributions. There is no earnings limit for deductible IRAs on taxpayers who are not covered by a qualified retirement plan. However, active participants in qualified retirement plans who want to make deductible IRA contributions as well as anyone with earnings who wants to make a Roth IRA contribution may be limited because of modified adjusted gross income (MAGI). For traditional IRA contributions, the phase-out threshold based on MAGI for 2019 is $103,000 for joint filers and surviving spouses (up from $101,000 in 2018). If MAGI exceeds this threshold, a partial deduction is allowed; no deduction can be taken when MAGI in 2019 exceeds $133,000. For single filers, the MAGI phase-out for 2019 begins at $64,000 (up from $63,000 in 2014); the phase-out is complete when MAGI in 2019 exceeds $74,000. For a spouse who is not an active participant but who is married to one who is, the MAGI phase-out range for 2019 is $193,000 to $203,000 (up from $189,000 to $199,000 in 2018).
• Income limits for Roth IRA contributions. Whether or not a taxpayer is an active participant, income may limit or prevent contributions. The MAGI phase-out range for joint filers for 2019 is $193,000 to $203,000 (up from $189,000 to $199,000 in 2018). For singles (including heads of households, the range is $122,000 to $137,000 (up from $120,000 to $130,000 in 2018).
• Retirement saver’s credit. Taxpayers who make deductible IRA contributions or contribute to 401(k) plans or ABLE accounts may also enjoy a tax credit for their savings activity. The credit percentage is based on adjusted gross income (AGI) and is applied to retirement savings up to $2,000. The income brackets for the 50 percent, 20 percent, and 10 percent retirement savers credit are expanding somewhat for 2019. This saver’s credit allows eligible taxpayers to double dip: in addition to the credit they can deduct IRA contributions or exclude salary added to 401(k)s. The credit is allowed until AGI reaches $64,000 for joint filers (up from $63,000 in 2018); $48,000 for head of households (up from $47,250); and $32,000 for married persons filing separately (up from $31,500).
While there continues to be some uncertainty, most tax rules for the coming year are set. For planning ahead, factor in the known changes for 2019. Be on the lookout for additional tax changes from Congress and the IRS that may impact the future.
Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.