Interesting fact: many tax provisions are indexed for inflation.
Okay, I may have a loose definition of “interesting.” But the fact is still true. And inflation indexing is actually a really important thing when it comes to taxes.
The Internal Revenue Service (IRS) recently made several announcements regarding the 2019 tax year, including the updated estate and gift tax exemption.
Also included in the announcements were annual inflation adjustments for over 60 tax code provisions for 2019: tax rate schedules, standard deductions, cost-of-living adjustments, and more.
In the spirit of Christmas, I thought I would explain what these inflation announcements are and what they mean to you. After all, nothing says “Merry Christmas” like taxes.
Important note: Keep in mind that the numbers discussed in this post are for the tax year beginning January 1, 2019. These are not the numbers you will use to prepare your 2018 tax returns which will be filed in April 2019 (you can find that information here). This is the information you will need for your 2019 tax returns in 2020.**
Tax Brackets and Tax Rates
The Tax Cuts and Jobs Act of 2017 (also known as the “Trump tax cuts”) adjusted the tax brackets (rates) in 2018. There are still seven brackets in 2019: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Here’s how income taxes work: The first $X of your income (the first tax bracket) is taxed at a low rate, the next $X of your income (the second bracket) is taxed at a higher rate, the next $X of your income (the third bracket) is taxed at an even higher rate, etc.
The tax rate for each bracket is known as the “marginal tax rate.” And while the marginal rates themselves don’t change every year, the amount of income for each bracket is adjusted for inflation.
Here's how those adjustments will look in 2019, broken down by filing status:
The tax rates for trusts and estates have changed, too:
To compare these numbers to the 2018 tax tables, see here.
Standard Deduction Amounts
In addition to the above-mentioned inflation adjustments, the standard deduction amount for 2019 increases to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly (and surviving spouses).
Remember: the Tax Cuts and Jobs Act eliminated the personal exemption. So you can no longer claim dependents for a personal exemption deduction.
And if you are a dependent of another taxpayer, you cannot claim the full standard deduction amount. You can, however, claim the greater of $1,100 or the sum of $350 plus the individual’s earned income.
There are also changes to a number of the itemized deductions found on Schedule A of your tax return form. (The numbers shown below are for taxpayers filing as “Married Filing Jointly.”) Here are changes to some of the more notable deductions:
Medical and Dental Expenses. You can only deduct medical and dental expenses that exceed 10% of your Adjusted Gross Income (AGI), up from 7.5% in 2018. This essentially means you can deduct fewer medical and dental expenses.
State and Local Taxes. Deductions for state and local sales, income, and property taxes remain in place but are limited to a combined total of $10,000 ($5,000 for married taxpayers filing separately).
Home Mortgage Interest. You may only deduct mortgage interest up to $750,000. Also, bear in mind that this deduction only applies to interest on acquisition indebtedness (a mortgage used to buy, build, or improve your home).
Pease limitations. High-income taxpayers are usually capped on the amount of certain deductions. These caps are called “Pease limitations” (named after the congressman who proposed them), and there are none in 2019.
Other deductions and tax credits were adjusted for 2019 or were changed by the Trump tax cuts. Here are a few of the most common:
Earned Income Tax Credit (EITC). The maximum EITC amount available in 2019 is $6,557 for married taxpayers filing jointly, provided that they have 3+ “qualifying children.” See Revenue Procedure 2018-57 for more information.
Child Tax Credit. This credit is expanded to $2,000 per “qualifying child.” The tax cuts also include a temporary $500 nonrefundable credit (meaning if you owe nothing in taxes, you don’t get this credit back as a refund) for other qualifying dependents.
Adoption Credit. If you adopt a child with special needs in 2019, you are allowed a credit of up to $14,080. The credit allowed for the adoption of other children is the amount of “qualified adoption expenses” up to a maximum of $13,810.
Student Loan Interest Deduction. This credit allows you to deduct for interest paid on student loans, and it was rumored to be eliminated by the 2017 tax cuts. The maximum deduction amount in 2019 remains $2,500; however, the amount of the deduction phases out if you Modified Adjusted Gross Income (MAGI) is more than $140,000 (for join returns) and is phased out entirely at $170,000 or over.
How do income taxes affect estate planning?
Although estate planning is usually more concerned with estate taxes than income taxes, income ultimately becomes an asset of your estate. The more you can limit income attributable to your estate, the less likely it is you will have to pay estate taxes.
Sometimes, it may be a matter of gifting income-producing and/or unappreciated assets to an individual in a lower income tax bracket (or to a trust for the benefit of that individual).
Or perhaps you take advantage of the new tax law’s beneficial treatment of pass-through entities, which subjects certain income to a preferential 20% rate rather than your higher individual tax rate.
Estate tax planning requires a lot of forethought, and income tax planning is one of the main considerations when it comes to avoiding or limiting estate taxes.
Talk to an Estate Planning Attorney and a CPA
**For tax-specific questions, you should consult with a certified public accountant (CPA) or other tax professional. Invite your financial advisers to visit with your estate planning attorney to craft an estate plan that provides the best income and estate tax benefits possible.
To discuss your estate plan and how you can protect your hard-earned assets from taxes, contact the experienced Oklahoma City estate planning attorneys at Postic & Bates today for a free, no-obligation consultation.
David M. Postic is an associate attorney at Postic & Bates, P.C. His practice includes estate planning, probate, real estate, business law, adoption, and litigation.
You can email David through our Contact Us page or by calling our office at (405) 691-5080.
[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]