We’ve all been hearing about the Tax Cuts and Jobs Act for over a year now and as the 2018 tax season arrives, the IRS, accounting firms and taxpayers alike are starting to see the effects of those changes: good, bad or ugly. Considering that you have been busy collecting all of your 2018 tax forms and thinking about starting your 2018 tax return (and thinking, and thinking…), it is hard to believe that it is time to start tax planning for the new year ahead! Below is a summary of some of the key 2019 tax law updates.
Estate and Trust Changes in 2019:
- The federal lifetime estate and gift tax exemption has risen in 2019 to $11,400,000 for individuals or $22,800,000 for couples (if they elect “portability” on a timely filed Estate Tax Return (Form 706) after the first to die). This means that a couple could potentially have a federal estate valued at $22,800,000 and owe no federal estate tax.
Maine lifetime estate tax exemption has been adjusted to $5,700,000 in
2019. As we all know by now, the State
of Maine has decided not to conform to the Federal Exemption amount, but has
adjusted their 2019 exemption for inflation. This means that while a large estate may not
owe tax at the federal level, it may still owe tax at the state level. While this exemption is available to each
member of a couple, it is not portable between spouses, and therefore
has a “use it or lose it” quality—a key reason to ensure your estate planning
documents are up-to-date.
- *What to watch: A bill was introduced in January of 2019 (LD 420, HP 329) proposing a reduction in the Maine lifetime estate tax exemption to $2,000,000 for estates of decedents dying on or after January 1, 2020 and removes the annual adjustment for inflation. If the bill passes, it could mean a significant increase in the number of taxable Maine estates in future years.
- The federal estate tax rate remains the same at 40% and the Maine starts at 8% and can increase to a top rate of 12% depending on the value of your estate. See the complete Maine Rate Schedule here.
- The annual gift tax exclusion rose to $15,000 in 2018 and remains the same in 2019. In essence, you can gift $15,000 to any person during the 2019 tax year without using any of your lifetime exclusion amount (the $11,400,000 mentioned above). This can be made as one bulk gift, or a series of smaller gifts throughout the year. In fact, your spouse can also gift the same individual $15,000, potentially resulting in an overall tax-free gift to an individual of $30,000 from a married couple. Annual exclusion gifting is a great way to help reduce the value of your overall estate during your lifetime without paying tax and hopefully, as a result, reducing the amount of tax you may owe at death.
- The number of income tax brackets for Trusts and Estates remain the same as in 2018, but are slightly wider due to inflation adjustments.
- In 2019, Trusts and Estates will receive more favorable capital gains treatment. The zero percent tax rate will apply for trusts and estates with taxable income up to $2,650. The 20% rate begins at $12,951. Any amount in between these amounts will be taxed at 15%.
Individual Income Tax 2019 Changes – Rates, Deductions and Credits:
- Tax Rates – While there are still seven tax brackets in 2019 (unchanged from 2018), Individuals will see a slightly wider set of brackets in 2019, due to inflation adjustments.
- Standard Deduction – The standard deductions have all
increased slightly due to inflation adjustments. Single filers (including Married Filing Separate)
will be able to claim a standard deduction of $12,200, while Married couples
will get a standard deduction totaling $24,400.
Heads of Household filers will receive an $18,350 standard deduction.
- The additional standard deduction amount for those 65 years or older, and the blind, is $1,300. This amount increases to $1,650 for unmarried taxpayers.
- Personal Exemption – As in 2018, there will be no personal exemption in 2019.
- Obamacare Penalties – While most provisions of the Affordable Care Act (“ObamaCare”) will remain in effect in 2019, one big change will occur: those who forgo health insurance in 2019 (or do not have health insurance for a span of time during the year) will not owe a penalty.
- Health Savings Accounts – The annual cap on deductible contributions to Health Savings Accounts will rise in 2019 to $3,500 for self-only coverage and $7,000 for family coverage.
- Medical and Dental Expenses – The “floor” for deducting medical expenses on Schedule A increases from 7.5% of your Adjusted Gross Income (AGI) in 2018 to 10% in 2019, which means you can only deduct those expenses that exceed 10% of your AGI. Ultimately, what this means is that even fewer taxpayers will qualify for this already elusive deduction.
- State and Local Taxes – Last year, one of the biggest concerns for taxpayers stemming from the Tax Cuts and Jobs Act was the limit on the State and Local Tax deduction (SALT). In 2019, the deductions for state and local taxes remain in place and, unfortunately, the limit remains unchanged as well. Deductions for state and local taxes are capped at $10,000 in 2019.
- Charitable Donations – The limit on charitable donations to public charities remains unchanged from 2018 at 60% of your AGI.
- Miscellaneous Deductions subject to 2% – Similar to the $10,000 cap on the SALT deduction, the elimination of the miscellaneous itemized deductions subject to 2% of AGI was yet another contentious issue arising from the 2018 tax law changes, and unfortunately, the law remains unchanged in 2019.
- Capital Gains Rates – Although the tax rates on long-term capital gains and qualified dividends have not changed from 2018 to 2019, the income thresholds to qualify for the various rates have gone up. In 2019, a zero percent rate applies for taxpayers filing single with taxable income up to $39,375 and $78,750 for Married Filing Jointly. The 20% rate starts at $434,500 for taxpayers filing Single and $488,850 for Married Filing Joint.
- Adoption credit – The adoption credit has been up for debate since the new tax law took effect and it was widely speculated that this credit would no longer be available in 2019. However, it remains available and can be taken on up to $14,080 of qualified expenses.
- Alimony Rules – Alimony that is paid on any divorce agreement made in 2019 will not be deductible by the spouse paying it and will not be taxable as income by the spouse receiving it. Older divorce agreements can be modified to adopt the 2019 tax law changes if both parties agree to the modification.
Retirement Plans – 2019 Changes:
- The maximum 401k contribution for 2019 is $19,000. If you are 50 years or older you can contribute an extra $6,000. These limits apply to 403(b) and 457 plans as well.
- The maximum Traditional and Roth IRA contribution for 2019 is $6,000. Taxpayers 50 years of age or older can contribute an additional $1,000.
- The phaseout limits on these contributions have increased in 2019.
Business Tax – 2019 Changes:
- Self-Employed Individuals and LLC, S Corp and other passthrough entity owners can deduct 20% of their Qualified Business Income (QBI), subject to limitations for those couples with taxable income in excess of $321,400 and those individuals with taxable income in excess of $160,700.
- Up to $1,020,000 of business assets can be expensed in 2019, and the amount phases out dollar for dollar once $2,550,000 of assets are put into service during the year.
- The 2019 standard mileage rate increased to 58 cents per mile.
- Medical travel and moving mileage rates increased to 20 cents per mile.