Accounting On Us
2019 Mid-year tax checkup
Your tax planning guide
Cheryl L. Dickerson, CPA
If you are anything like me, you are wondering how it could already be the middle of 2019. Weren’t we all just singing auld lang syne? While Game of Thrones ended, taxes just keep going. The months fly by and before you know it, the time has come to assemble your documents for yet another tax preparation season.
Tax reform impact
The memory of the most recent tax season may be seared in your mind. Many clients were taken by surprise how their individual return was impacted by the changes that went into effect in 2018 from the Tax Cuts and Jobs Act (TCJA). You undoubtedly heard the news reports before you prepared your taxes about individuals who always had received refunds being hit with tax due on their 2018 return. The shock came in finding out you were one of those. So, as you ponder your 2019 tax, what can you do now to avoid the same scenario for your 2019 return?
The common misconception regarding the 2018 return was that taxes had increased, resulting in balances due for a wide range of taxpayers. The truth is, the tax rates were reduced and those rates stay in effect for the 2019 tax year. Due to many of the changes impacting individuals, your withholding may not have been enough and resulted in your balance due. If you haven’t adjusted your 2019 withholding, the reality is that your 2019 results may mirror those of 2018. You should review your 2019 withholding to date and assess if the amount being deducted from your pay check will be enough to meet your 2019 liability.
The IRS has a withholding calculator on its website. This is a tool that you can use to review your withholding and, if necessary, adjust the amount with your employer by completing a new Form W-4. You can also use this tool to review your withholding from your pension income. Your Henry+Horne tax advisor can assist you in evaluating your tax position for 2019 and provide you with guidance as to the proper amount of withholding or estimated tax payments that should be made.
The changes to itemized deductions that went into effect in 2018 continue in 2019. Many taxpayers who formerly itemized found in 2018 their standard deduction resulted in a larger deduction. The standard deduction in 2019 is adjusted for inflation and are as follows:
- Married filing joint $24,400
- Single and married filing separately $12,200
- Head of household $18,350
Medical expenses are deductible for federal income tax purposes to the extent they exceed 10% of your adjusted gross income (AGI) in 2019. The deduction for taxes (state income or sales, real estate, personal property) remains limited to $10,000. Charitable contributions are deductible to the extent of 60% of your AGI. Gone are the deductions for employee business expenses, moving expenses and miscellaneous itemized deductions, including investment advisory fees.
You should review your itemized deductions considering the standard deduction. A bunching of your charitable contributions into one tax year may allow you to exceed the standard deduction, resulting in a greater tax benefit than if you were to donate each year. Keep in mind that any charitable contribution you make that is allowable as an Arizona tax credit contribution does not result in a federal charitable deduction. Legislation in 2018 required that a charitable contribution must be reduced by the dollar amount of any state tax credit allowed for the contribution.
If you are receiving distributions from your individual retirement account, you should consider the qualified charitable distribution (QCD). Taxpayers may direct up to $100,000 per year to be donated from their individual retirement account to a qualified charity. The amount of the donation is not included as part of the taxable distribution, so it reduces your income. The amount donated, while not included in income, is not includible as a charitable contribution. The QCD is included as part of the required minimum distribution calculation. If you are not receiving a tax benefit from your charitable deductions due to the higher standard deduction amounts, this approach may result in tax savings for you. Your Henry+Horne tax professional can advise you of the potential tax impact of this strategy.
Families with students attending or enrolled in elementary or secondary public, private or religious schools should be aware of the change to the rules of 529 plans. Prior to 2018, distributions from a 529 plan could not be used to pay tuition for students in elementary or secondary public, private or religious schools. The TCJA now allows 529 distributions of up to $10,000 per year per beneficiary to be used for tuition for elementary school and secondary school tuition.
Health insurance coverage
In 2019, the penalty for not maintaining minimum essential health insurance coverage, referred to as the shared responsibility penalty, is eliminated. As it currently stands, the requirement to have minimum essential coverage continues to exist. The penalty has become a non-factor with the elimination in 2019.
Are you enrolled in a 401(k) plan? Consider maximizing the amount you contribute. Every dollar you contribute reduces your taxable income. The earnings in your 401(k) plan are not subject to tax until you receive distributions from the account. The contribution limit for employees has increased in 2019 to $19,000. The catch-up contribution for employees aged 50 and over who participate in a 401(k), 403(b) and most 457 plans remains at $6,000. If you are contributing to an individual retirement account (IRA), the contribution limit in 2019 has increased to $6,000. There is an additional catch-up contribution for individuals aged 50 and over of $1,000.
Health savings accounts
Do you have a health savings account? Maximizing the contributions to your health savings account reduces your income and, like the 401(k), earnings within the HSA are not subject to tax. Distributions from the account must be used to pay qualified medical expenses to avoid tax. In 2019, the contribution limit for self-coverage is $3,500 and $7,000 for family coverage.
Contributing to your retirement or health savings accounts is just one of many strategies that can reduce your currently taxable income while retaining the amounts that in later years can be used for your benefit.
Major life changes
If 2019 is a year of change for you – marriage, a new baby, adoption, moving to a new state or significant gains or losses on sales of assets – then probably the last thing you are thinking about is tax planning. Changes in your life generally mean changes in your tax situation. Tax planning should become an integral part of your routine. There have been far too many situations during my tax career that I’ve been witness to bad tax results that could have been avoided or minimized with proper planning. That’s not to say there aren’t times when the tax can’t be changed, but I find that with taxes, as with many things in life, it’s better to know what is coming than to be caught by surprise.
2019 Arizona changes
After a great deal of debate, the Arizona Legislature passed HB 2757, which brings in several changes to Arizona law. The bill passed May 27, 2019 is awaiting Governor Ducey’s signature. He is expected to sign the bill as part of the state budget agreement. So, what is going to be different in 2019?
New tax rates will apply beginning in 2019. The top Arizona rate of 4.54% in 2018 will decrease to 4.5%. There are reductions and expansions of the taxable income brackets that apply to the other Arizona rates. Gone is the deduction for winnings from the Arizona state lottery, so if you were fortunate to be a winner, you will not receive any tax relief for your winnings in 2019.
Taxpayers were previously given a deduction for dependents under Arizona law. The deduction has been replaced by a credit. For single, head-of-household or married filing separate taxpayers whose income is less than $200,000, the credit is $100 for each dependent under age 17 at the end of the tax year. For married couples filing a joint return, the income limit is $400,000. Incomes above the threshold amounts are subject to a reduction in the amount of credit allowed.
Many of you struggled with compiling your data due to the increased federal standard deduction and lower Arizona standard deduction. The Arizona standard deduction will increase and be in sync with the federal standard deduction beginning in 2019. For a single individual or married person filing a separate return, it increases to $12,200, head-of-household $18,350 and a married couple filing a joint return will have a standard deduction of $24,400.
Disheartened to think your charitable contributions will provide you with no tax benefit due to the increased standard deduction amounts? In Arizona, your standard deduction will be increased each year by an amount equal to 25% of your charitable contributions.
We will cover more of the Arizona changes that affect you in our July e-Newsletter as well as on our Tax Insights blog, so be sure to subscribe. If you have questions, don’t hesitate to reach out to your Henry+Horne professional tax advisor.