Cost-Of-Living Adjustments Announced for 2019: What Do They Mean for You?

New 2019 cost-of-living adjustments have been published by the IRS, including many increases but a few amounts that remained unchanged from 2018. As you finish your 2018 year-end tax planning, be sure to take these 2019 adjustments into account.

The Tax Cuts and Jobs Act (TCJA) changed the approach to cost-of-living adjustments, most notably to calculate these adjustments using the chained consumer price index (C-CPI-U) — a permanent change. The result is to increase tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than under the previous consumer price index, which could potentially push taxpayers into higher tax brackets and make various breaks worth less over time.

Individual tax brackets and standard deductions

For 2019, tax-bracket thresholds will increase for each filing status, with the largest increases in the higher brackets. For example, the top of the 10% bracket increases by $175 to $350, depending on filing status, but the top of the 35% bracket increases by $10,300 to $12,350, varying by filing status.

Personal exemptions are suspended through 2025 under the TCJA. However, the new tax law nearly doubled the standard deduction, indexed annually for inflation through 2025. The standard deduction for 2019 will be $24,400 (married couples filing jointly), $18,350 (heads of households), or $12,200 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to pre-TCJA amounts.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who have previously itemized deductions.

Alternative minimum tax

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are indexed annually for inflation. For 2019, the threshold for the 28% bracket increased by $3,700 for all filing statuses except married filing separately, which increased by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2019 are $71,700 for singles and heads of households and $111,700 for joint filers, increasing by $1,400 and $2,300, respectively, over 2018 amounts. The inflation-adjusted phaseout ranges for 2019 are $510,300–$797,100 (singles and heads of households) and $1,020,600–$1,467,400 (joint filers). Amounts for separate filers are half of those for joint filers.

Tax breaks for education and child-related expenses

Maximum benefits for various education- and child-related breaks generally remain unchanged for 2019. However, most of them are limited based on a taxpayer’s modified adjusted gross income (MAGI). Those with MAGIs within the phaseout range are eligible for a partial break, but the breaks are eliminated entirely for those whose MAGIs exceed the top threshold.

In general, these MAGI phaseout ranges remain the same or increase modestly for 2019:

The adoption credit. The MAGI phaseout ranges for eligible taxpayers adopting a child also increase for 2019 — by $4,020 to $211,160–$251,160 for joint, head-of-household and single filers. The maximum credit increases by $240, to $14,080 for 2019.

The Lifetime Learning credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2019. They’re $116,000–$136,000 for joint filers and $58,000–$68,000 for other filers — up $2,000 for joint filers and $1,000 for others.

The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2019: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.

Gift and estate tax exemptions

The generation-skipping transfer (GST) tax exemption and the unified gift and estate tax exemption are both adjusted annually for inflation. For 2019, the amount is $11.40 million (up from $11.18 million for 2018).

The annual gift tax exclusion remains at $15,000 for 2019.

Retirement plan limits

Some, but not all, retirement-plan limits increases for 2019. If you’ve been contributing maximum amounts already, you may have limited opportunities to increase your retirement savings rate:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2019:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
  • For a spouse who participates, the 2019 phaseout range limits increase by $2,000, to $103,000–$123,000.
  • For a spouse who doesn’t participate, the 2019 phaseout range limits increase by $4,000, to $193,000–$203,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2019 phaseout range limits increase by $1,000, to $64,000–$74,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2019 phaseout range limits increase by $4,000, to $193,000–$203,000.
• For single and head-of-household taxpayers, the 2019 phaseout range limits increase by $2,000, to $122,000–$137,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Tax planning and 2019 cost-of-living adjustments

With the 2019 cost-of-living adjustment amounts trending higher across most categories, you have an opportunity to realize some tax relief next year. In addition, with some retirement-plan-related limits also increasing, you have the chance to boost your retirement savings.

If you would like to talk to someone about your specific situation and how to plan effective tax strategies for 2019, please call Weaver at 1.800.332.7952 or submit a request at https://weaver.com/contact-us. We’d be happy to help.

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