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Results of the new tax law in 2018 and 2019 tax planning

John J. FureyMay 10, 2019

Taxes

A client asked how she can tell if her 2018 federal taxes increased or decreased under the new tax law and what steps she should take to plan for her 2019 taxes?

Comparing Results for Tax Years 2017 and 2018

The best way to determine the impact of the new tax law is compare line 15 of your 2018 tax return to line 63 of your 2017 tax return. Those lines show your total taxes for those years. If your income was about the same in 2017 and 2018 and your total tax increased by 5K in 2018, your federal taxes increased because of the new tax law. The most likely cause of the increase was due to the inability to deduct many Itemized Deductions in 2018 that could be deducted in 2017. The tax rates generally decreased in 2018, but if your Itemized Deductions decreased by a significant amount your taxes likely increased.

If your income was about the same in 2017 and 2018 and your total taxes went down by $5K, the three most likely reasons were:

  1. The significant increase in the Standard Deduction;
  2. The decrease in the tax rates; and
  3. The $2K tax credit for children under age 17 on 12/31/18.

Many taxpayers use the amount of their tax refund to determine if the new tax law benefited them. This measure can be misleading especially if your main source of income is W-2 wages. In the second example above where your taxes decreased by 5K, you may have only received a 1K increase in your refund in 2018 compared to 2017. The reason that you received only a 1K increase in your refund is that the IRS changed the tax withholding tables in February 2018. The change decreased the amount of federal taxes withheld from each of your pay checks after February 2018 to reflect the new lower tax rates. You received the other 4K of your tax decrease through the increase in your take home pay from March through December of 2018.

This lower withholding amount will be in effect for 12 months during 2019. You should check to determine if your withholding amount in 2019 is adequate to meet your tax obligation. If it is not, you may owe money when you file your taxes for 2019.

Steps to Assist with 2019 Tax Planning

Step 1. Estimate your expected income.

Step 2. Determine if you can reduce your income by:

  • Making before-tax contributions to a 401(k) account, a flexible spending account or a Health Savings Account (HSA).
  • If you are over 70 ½, making a Qualified Charitable Deduction (QCD) out of your Required Minimum Distribution (RMD) to reduce your income. For example, if your RMD is $50K and you use $10K to make a QCD, only $40K is included in your income.

Step 3. Determine if you can make any adjustments to your income, such as deductions for IRA contributions, Health Savings Account contributions, or Student Loan Interest payments.

Step 4. Determine if you will use the Standard Deduction or if you will Itemize Deductions

Standard Deduction Tax Year 2019
Single $12,200
Single (age 65 or older) $13,850
Married (filing joint) $24,400
Married (one person 65 or older) $25,700
Married (both 65 or older) $27,000
Head of Household $18,350
Head of Household (65 or older) $20,000

 

Itemized Deductions

You will likely only be able to deduct the following 4 items:

  1. Medical expenses that exceed 10% of your Adjusted Gross Income (AGI);
  2. State and Local Income Taxes and Real Estate Taxes (SALT) up to $10K;
  3. Mortgage interest; and
  4. Charitable contributions.

If you do not expect the above 4 deductions to exceed your Standard Deduction, you will use the Standard Deduction.

If the total of your Itemized Deductions is close to your Standard Deduction in 2019, consider pre-funding a few years of charitable contributions by donating highly appreciated securities to a Donor Advised Fund. You receive a tax deduction for the fair market value of the securities on the date of donation in 2019. You do not pay any capital gains tax on the appreciation in the securities. In tax years after 2019 you can then use the higher Standard Deduction.

Step 5.  Estimate your Total Taxes by comparing your actual Taxable Income (TI) for 2018 (line 10) to your estimated TI for 2019. If the Taxable Incomes are about the same your Total Taxes should be similar. If your income, other than long-term capital gain income, is substantially higher or lower you can multiply the higher or lower amount by your tax rate from the below table. You can then add or subtract the amount from your Total Taxes.

2019 Income Tax Brackets based on Taxable Income (TI)

Tax Rate Single Married Head of Household
10% 0 to $9,700 0 to $19,400 0 to $13,850
12% $9,701 to 39,475 $19,401 to 78,950 $13,851 to 52,850
22% $39,476 to 84,200 $78,951 to 168,400 $52,851 to 84,200
24% $84,201 to 160,725 $168,401 to 321,450 $84,201 to 160,700
32% $160,726 to 204,100 $321,451 to 408,200 $160,701 to 204,100
35% $204,101 to 510,300 $408,201 to 612,350 $204,001 to 510,300
37% Over $510,300 Over $612,350 Over $510,300

 

Step 6. Estimate your Total Payments by projecting how much will be withheld from your wages, social security payments, pension payments, and IRA payments. Also include any 2018 overpayments that you applied to your 2019 taxes and any quarterly estimated payments that you will make in 2019.

Step 7. Compare your Total Taxes to your Total Payments to determine if you should receive a refund or owe taxes. If your Total Payments do not exceed the lesser of 1) 90% of your 2019 Total Taxes; or 2) 110% (if your 2018 Adjusted Gross Income was over $150K) of your 2018 Total Taxes, then you will owe additional interest and penalties. For tax year 2018 only, the IRS lowered the 90% to 80% because many taxpayers were under withheld because of the new withholding tables implemented in February 2018.

If you have any questions about tax projections, tax payments, Qualified Charitable Distributions, Donor Advised Funds or other tax issues, please do not hesitate to call our office (610-651-2777)