You may need to reconsider how you file your return
In 2018, the most significant changes to US individual taxes since 1986 took effect. Many taxpayers were happy with their increased paychecks during the year, but surprised that they had taxes to pay or a smaller refund at year-end. Now that there’s more clarity in the rules, and a better understanding of how the Tax Cuts and Jobs Act affects your personal tax situation, you may want to adjust your withholding to reflect the changes.
Your paycheck
Most taxpayers should expect to see a slight reduction in income taxes from pre-2018 levels based on changes to marginal income tax rates, especially at higher incomes. The following table presents seven tax brackets under the current law for the year 2019.
| Tax Rate | Married Filing Joint | Individual |
| 10% | $0 to $19,400 | $0 to $9,700 |
| 12% | $19,401 to $78,950 | $9,701 to $39,475 |
| 22% | $78,951 to $168,400 | $39,476 to $84,200 |
| 24% | $168,401 to $321,450 | $84,201 to $160,725 |
| 32% | $321,451 to $408,200 | $160,726 to $204,100 |
| 35% | $408,201 to $612,000 | $204,101 to $510,300 |
| 37% | $612,001 or more | $510, 301 or more |
All tax rates and brackets will sunset on December 31, 2025 (meaning that Congress will need to act to keep or change the rates). However, whatever rates are then in effect will adjust each year to account for rising costs of goods and services.
Bottom line: If you were upset by this year’s refund or tax bill, consider changing your withholding to prevent a repeat in the 2019 tax year. Check with your company’s human resources or payroll departments to make sure you are withholding the correct amount based on the new tax brackets.
Deductions
The current law increased the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly, and repealed the prior personal exemption amount of $4,050 for tax years 2018 through 2015. In addition, many itemized deductions have been changed or eliminated. For some, the higher standard deductions mean they no longer need to itemize. Others may see higher taxes resulting from the elimination of certain itemized deductions.
Notable changes to deductibility rules include the following:
- Deductions for medical expenses for those under age 65, which had been lowered to a 7.5% of Adjusted Gross Income (AGI) floor for 2017 and 2018, have returned to 10% in 2019.
- Deductions for state and local income, sales, and property taxes are now capped at a combined $10,000 (or $5,000 for married taxpayers filing a separate return). This provision, which will sunset in 2025, is likely to affect people who live in high-income-tax states.
- Home mortgage interest deductions cannot exceed $750,000, and home equity interest payments are no longer deductible.
- Deductions for alimony payments are repealed starting in 2019, but no longer will be taxable as income to the recipient.
Retirement accounts
Most of the rules for 401(k) and other types of retirement plans remain the same under the current law. The law did repeal the rule allowing a taxpayer to recharacterize their Roth IRA conversion back to a traditional IRA, which removes the benefit of a “do-over” if the converted assets have poor returns in the year following the conversion.
Gifts to others
Families should generally be happy with the current tax rules, since the annual gifting exclusion has increased to $15,000.
Broader use of college savings plans
College savings plans are not just for college anymore. You can now use 529 funds tax-free for qualified K-12 private school education expenses. You might want to add to existing or start new 529 plans for grandchildren, knowing that the money can now be used before college.
Pensionmark Financial Group does not provide tax or legal advice. Please consult with a tax professional prior to deciding on any distribution option.