Three Tax Changes for 2019

By Egan on January 3, 2019

Most of these changes will likely affect your household!

The Tax Cuts and Jobs Act of 2017 made large, sweeping changes to the tax code that could have profound effects on peoples’ tax bills and tax strategies. Some changes are obscure and only make a difference for a small portion of the population. However, three adjustments are standout game changers for the population as a whole. Read on to find out what they are, how they affect you, and strategies for navigating the new landscape.

Exemptions and Deductions

The personal exemption is gone. In 2017, you could claim $4,050 for yourself, your spouse, and each of your dependents, then subtract that amount from your income, helping to reduce your taxable income. That is no longer the case. Since larger families benefited more from the personal exemption (4,050 x 6 is a bigger number than 4,050 x 3), they may disproportionately feel the effect of its termination. However, there is some good news. The Child Tax Credit has been increased. In many situations, tax credits can be more beneficial than exemptions or deductions because a tax credit directly reduces the amount you owe the IRS once you’ve finished calculating your overall tax bill. In 2017, families took advantage of a $1,000 deduction to their tax bill for every child they have. In 2018, the number will increase to $2,000 for every child. The phaseout threshold for this benefit has also been increased significantly. In addition, the Child and Dependent Care Credit is still intact. Lastly, the standard deduction has increased. The standard deduction is a set amount a household gets to deduct from their income and is determined by the household’s filing status. In 2017, the standard deduction for a married household filing jointly was $12,700. For 2018, that amount has increased to $24,000. An increased number of households who previously itemized may end up taking the standard deduction for their 2018 taxes because of significant limits placed on the itemizable deductions. For example, state and local taxes (SALT).

Passing the SALT

Along with mortgage interest, state and local taxes was one of the largest itemized deductions for many households. This deduction is no longer allowed, which will eliminate many households’ ability to itemize and incentivize them to take the standard deduction instead. However, if you wish to maximize your deduction powers, there are steps you can take. Deduction bunching is one strategy you can use. Deduction bunching is when you concentrate your spending on itemizable items within a particular tax year. This means pushing items such as deductible retirement plan contributions, property taxes, charitable contributions, and other large deductible items to every other year, claiming the standard deduction in the years between. By concentrating all of your itemizable items into specific years, they may equal an amount larger than the standard deduction, maximizing the amount you can deduct from your income.

Tuition Savings Benefits

529 plans are a popular way parents save for their kids’ education. The 2017 Tax Cuts and Jobs Act expanded the ways in which parents can utilize these tax advantaged accounts to pay for education. Starting in 2018, money in a 529 can be withdrawn tax free to pay for k-12 tuition at private or religious schools. Up to $10,000 per year can be withdrawn for these expenses. This was not allowed before. Previously, only Coverdell ESA accounts could only be used for k-12 expenses, which have many more restrictions than 529 accounts. Coverdell ESAs can be rolled into a 529 account with no tax consequences, opening up options and opportunities for families who wish to save in a tax savvy fashion for their kids’ education. If you’re saving for both k-12 and college tuition in a 529 plan, it can be helpful to have separate accounts due to the different timelines of the savings goals.

Taxes can be intimidating. Keeping on top of basic changes can help you partner with your tax and wealth management professionals to promote the best possible outcome for you and your family. A fantastic way to ensure all of your professionals are in your corner working in concert for your best interests is to introduce us to your CPA if you are not already working with us to prepare your taxes. That way, we can all work together to manage the various components of this shifting landscape. As always, we’re here to help you strategize and to answer any questions you might have. Happy 2019!

The Egan Group and HighTower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor before establishing a retirement plan.