Note: Before altering your tax strategy, it’s important to sit down and consult with your tax specialist. They have a firm understanding of your wants and needs, as well as the knowledge of tax law required to maximize your wealth potential.
Yes, it’s still early 2020. April 15th may seem far, far away; however, whether you’ll be using tax preparation software to do your taxes or going to an accountant or other tax professional, you still need to collect some documents and other information. The more organized and complete this information is, the faster and easier the tax preparation process will be and the less likely you’ll have costly errors and omissions.
Get It Together
In the coming weeks, you’ll receive documents reporting the income earned from your job. Most people receive a W-2, but you may get a 1099-MISC if you worked as an independent contractor. You may also receive other 1099 forms reporting your investment and interest income, state and local tax refunds, IRA/pension distributions, Social Security benefits, and more. It may be helpful to make a spreadsheet of the documents you’re expecting and check them off when you receive them.
It’s also wise to get your documentation for tax deductions and credits together. Review your credit card annual summaries and your checking account activity for deductible expenses. Even though some deductibles were eliminated or modified with last year’s tax changes, there are still plenty of opportunities for deductions, including mortgage interest, medical expenses, charitable contributions, child and dependent care, and property taxes.
Tax Changes for 2019
You probably noticed some big changes to your tax return last year that resulted from the sweeping 2017 tax reform legislation called the Tax Cuts and Jobs Act. Most of those changes took effect in the 2018 tax year. Two big changes, listed below, didn’t take effect until the 2019 tax year.
- No more individual mandate: The individual mandate that was part of the Affordable Care Act (ACA)—commonly known as Obamacare—is gone. That means if you didn’t have health insurance in 2019, you will not pay a tax penalty as a result.
- Alimony changes: The other big change involves alimony and separation payments. If you finalized your divorce or separation agreement in 2019 and are required to pay support to your former spouse or partner, you can’t deduct those payments from your taxable income. If you’re the one receiving support payments, you should not claim the money as income. This will continue to be the case for people who divorce this year and in the future.
If your divorce or separation agreement was finalized before 2019, these changes probably won’t affect you. However, they will affect you if you made changes last year to the terms of your payments.
For example, if you and your spouse divorced in 2010, you have been paying alimony, and you’ve probably been including the amount of those payments in your itemized deductions each year. However, if you modified your divorce agreement in 2019 to reduce the amount of alimony you’re paying (or maybe to increase it), you can no longer deduct it on your taxes, and your ex-spouse should no longer report it as income.
Some aspects of taxes saw big changes in 2018 with the TCJA. Several of those items will see relatively minor changes (to adjust for inflation) for the 2019 tax year. Let’s look at those:
- Standard deductions: This is the amount the IRS lets you deduct from your income to determine your taxable income without having to itemize individual deductions. For the 2018 tax year, the standard deduction nearly doubled. For the 2019 tax year, it increases again. It goes up by $200 for single filers and married people filing separately (to $12,200), by $350 for people filing as heads of households (to $18,350) and by $400 for married couples filing jointly (to $24,400). If you’ve got numerous deductible items, however, it’s best to see what they add up to and whether you’re better off itemizing or taking the standard deduction.
- Alternative Minimum Tax (AMT): Two elements of the AMT are increasing for inflation after big jumps for the 2018 tax year. The vast majority of people don’t have to worry about the AMT, but let’s take a brief look at what it is.
The AMT is basically a parallel tax system that requires those required to pay it to use different calculations to determine the amount of tax due. It was implemented over 50 years ago by Congress. The purpose of the AMT is to help make sure that people with very high incomes pay a fair share of income taxes. It does that by eliminating some popular deductions (like property taxes, for example) that very wealthy people were able to use to significantly decrease their tax burden for people required to pay the AMT.
(Don’t worry if you’re unsure whether the AMT applies to you. Your tax preparation software will let you know. Of course, if an accountant does your taxes, they’ll tell you. You can also learn more about the AMT on the IRS.gov website.)
With the TCJA, Congress sought to lessen the number of people required to use the AMT. They significantly increased the exemption amounts (which is basically the same as a deduction). The higher the exemption, the lower your taxable income and the less likely you are to be subject to the AMT. It also increased the income level at which the exemption is “phased-out” or reduced. The end result is fewer people having to use the AMT.
For 2019, the AMT exemption for single and head of household filers has increased by $1,400 (to $71,700), $2,300 for married couples filing jointly (to $111,700) and $1,150 for married people filing separately (to $55,850).
The AMT phase-out thresholds have increased this year by $20,600 for married couples filing jointly (to $1,020,600) and for those in all other filing categories by $10,300 (to $510,300).
- Tax bracket income ranges: While tax rates remain the same as last year (the minimum tax rate is 10%, and the maximum is 37%), the income ranges have increased for inflation. In order to calculate how much tax you need to pay, you must know your tax bracket. (There are seven). Your bracket is determined by your income, as well as your filing status. The tax tables will be available from the IRS with the 2019 tax forms and with tax preparation software and online programs.
What Changes in Your Life Affect Your Taxes?
Life changes can always affect your tax filing status and your deductions. Let’s look at some examples of changes that will likely affect your 2019 taxes. (These are not changes to the tax code. They’re simply changes in your life that could have a big impact on your tax return.)
Marital status: If you got married, divorced or were widowed in 2019, your tax filing status will change. Married couples often file jointly because the standard deduction is twice as high as for married people filing separately (as we noted above under “Tax Changes for 2019).” If your divorce was finalized by the last day of 2019, you will likely need to file using the “Single” status. If you have one or more dependent children in your home, you may be able to file as “Head of Household.”
The number of dependents in your home: If you had or adopted a child this year, remember that you’ll qualify for a child tax credit (or an additional one if you already had children). You can also claim a child tax credit for foster children, stepchildren and other relatives who are minors. If you’re sharing custody of a child, they must be living with you more than half the year and you must pay for more than half their support. People who care for other dependent family members, such as elderly relatives, can also receive tax credits.
Buying a home: Being a homeowner still comes with significant tax advantages. If you itemize your deductions, you can deduct mortgage interest and your property taxes (currently capped at $10,000). If you paid points to your lender when purchasing a home in 2019, you can also deduct those.
Other changes, for better or worse, can impact what you need to report on your taxes. Your tax preparer can provide guidance based on your situation. Tax preparation software also asks questions about changes that can impact your taxes.
Don’t Forget About Your 2019 IRA Contribution!
There’s still time to make a 2019 contribution to a qualifying traditional or Roth IRA that can reduce your tax burden. The deadline is April 15, 2020. Contributions are tax deductible up to $6,000 for people under 50 and up to $7,000 for those 50 and over.
Start organizing now for next year’s taxes. Keep track of expenses that may be deductible. Start an online file for digital receipts (like emails confirming charitable contributions) and maybe a good old-fashioned filing cabinet for paper ones. The fewer places you have to search for your tax-related items, the smoother your tax preparation will be a year from now.