​2019 Federal Tax Law

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ROTH TAX & FINANCIAL SERVICES - David Roth, EA

Professional Tax Preparation & Investment Planning​​

 

 

****THE FOLLOWING IS EXTREMELY IMPORTANT INFORMATION



This is an outline of some of the biggest changes to the new tax law that went into effect for the 2018 tax year and are still in effect in addition to new tax benefits offered in the Covid Cares Act of 2020.


The Covid Cares Act permits you to withdraw up to $100,000 from your retirement accounts (Traditional IRA, Roth IRA, 401K, 403b, SEP) as long as you were impacted economically by the pandemic in 2020.  If you are younger than 59 1/2 years old you would normally receive a 10% penalty for an early withdrawal from theses types of accounts but through the Cares Act they are waving this.  You will still owe tax on the amount you withdraw but you are able to spread that tax burden evenly over 3 years.  If you are able to recover economically you then have the option to deposit the funds back into you retirement account within those 3 years and get a refund of the taxes you previously paid.  ​


​​In the spring of 2020 the government offered a stimulus of $1,200 for single filers and $2,400 for married filers.  The Treasury Department used the incomes determinations from either the previously file 2018 or 2019 tax returns.  You got the full amount if you made less than $75,000 AGI for a single filter and $150,000 AGI for married joint filers.  If you made more than that the amount diminishes $5 for every additional $100 of income and phased out completely if you made more than $99,000 AGI as a single filer and $198,000 AGI as married joint filers.  Many didn't qualify for stimulus payments due to higher incomes in 2018 and 2019 but suffered great financial hardships during 2020.  For those taxpayers they will be able to apply for the Recovery Rebate Credit by using your 2020 income and requesting the stimulus that you might have not qualified for previously. There is currently a new stimulus being rolled out in Congress for the beginning of 2021 and they will be using the income on the 2019 tax return for that.  If you want to look up your AGI for 2019 pull up your 2019 tax return and look at Form 1040, line 8b.  


The Child Tax Credit and the Earned Income Tax Credit will use your income in 2019 in addition to 2020’s income, compare them and then use the income that gets the largest credit if you qualify for either of these credits.  Of course the first one is for those of you with dependent children and the second one is for very low income tax payers.

The current 7-tier tax bracket will be reduced to four tax brackets. They are as follows:

SINGLE FILERS
10% - Income $0 to $9,875
12% - Income $9,876 to $40,125
22% - Income 40,126 to $85,525
24% - Income $85,526 to $163,300

32% - Income $163,301 to $207,350

35% - Income $207,351 to $518,400
37% - Income $518,401 and up

MARRIED FILERS
10% - Income $0 to $19,750
12% - Income $19,751 to $80,250
22% - Income $80,251 to $171,050

24% - Income $171,051 to $326,600

32% - Income $326,601 to $414,700

35% - Income $414,701 to $622,050
37% - Income $622,051 and up

This next section is particularly important to your deductions as taxpayers.

STANDARD DEDUCTION:
The standard deduction is for those that don’t have itemized deductions that add up to or more than the standard deduction that the government gives you. Back in 2017 the standard deduction was $6,350 for a single filer, $9,350 for head of household and $12,700 for a married filer. Under the 2020 plan they nearly double the standard deduction so that single filers can deduct $12,400, $18,650 for head of household and married filers can deduct $24,800. This sounds appealing on paper but there are hidden factors here. Under the old system each taxpayer AND EACH OF THEIR CHILD DEPENDENTS got an additional $4,050 deduction called personal exemptions. This deduction has been eliminated.  For example in the old 2017 system a married couple with 3 children would get a standard + personal exemption deduction of $32,950 ($12,700 for married filers + $8,100 for their personal exemption + $12,150 for their three children). But in the current tax plan that same family would get a total of $24,000 in the deduction.


CHILD CREDITS:

The credit increases up to $2,000 per child, and the first $1,400 is refundable, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit increases from $110,000 to $400,000 for married couples filing jointly. The expanded credit ends after 2025.  There is also an update through the Covid Cares Act that I illustrated above.  


ITEMIZED DEDUCTIONS:

This is the area that has the most dramatic changes. The new law raised the standard deduction and therefore eliminated most of the itemized deductions. Itemized deductions are things like medical expenses, state and local taxes, mortgage interest, property and personal property taxes, charitable contributions, tax preparer expense & unreimbursed employee job expenses. If these deductions add up to more than your allotted standard deductions then you are allowed to use those to your benefit instead of the standard deduction.

The following aforementioned deductions remain:

  • Charitable contributions remain but with the increased standard deduction it may discourage taxpayers that normally contribute as they might not get the deduction.  The is an idea kicking around of having a donor-advised fund.  This would allow the taxpayer to take multiple years of payments in to the fund and add them up and claim them in one particular year. Update in 2020 individual and joint filers are able to deduct up to $300 in charitable contributions in addition to the standard deduction.  
  • Property taxes, state and local tax & sales tax.  This has been bundled into one.  You can chose two of these three to deduct but they are capped in total at $10,000.  This negatively impacts home owners particularly in high taxed regions of the country.
  • Mortgage interest but again not for all. This new plan would reduce your allowed deduction to up to two mortgages totally no more than $750,000. This again punishes those in higher housing markets.
  • ​Student loan interest is still allowed as a deduction up to $2,500 with certain income limitations.

 

The following are the deductions which the 2018 new tax laws eliminated :


  • Unreimbursed Employee Expenses - This is of particular interest to those in the freelance workforce. A good example of this is the performing artist. These employees are required to stay up on their craft at their own expense. Some of these are as follows:
    • Many of these artists pay an agent at least 10% of their income.
    • Most pay 2% to 4% to their union from weekly incomes.
    • Tools or musical instruments. Many musicians have anywhere from $20,000 to $200,000 in instrument costs. Also many of these deductions are depreciated over 7 years. At this time it appears that those taxpayers that haven’t exhausted their deductions through depreciation would not recover the remaining deduction.
    • Promotional materials and advertising to remain relevant in a short term employment contract market.
    • Home Office Expenses
    • Required work clothing or uniforms
    • Required travel, lodging and food in the required course of their work.
  • Medical Expenses - The new tax law increased the limits that can be deducted. Taxpayers that incur major medical expenses can now only deduct the amounts that exceed 10% of their adjusted gross income.
  • Tax Preparation fees
  • ​​Moving Expenses for Work - The old plan allows a taxpayer to deduct these expenses if there new job is full-time and the new location is more than 50 miles from their previous location. It should be noted that this deduction is still allowed for businesses even if they move their business overseas.