Never too early to organize your tax documents for 2019

Although the tax deadline for filing and paying 2019 federal income taxes is still months away, it’s never too early to get organized.

On a yearly basis (usually in November) the IRS adjusts as many as 40 tax provisions for inflation. This is done to prevent what is called “bracket creep,” when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any increase in real income. In some cases the changes may seem minimal, but hey – a penny saved is a penny earned!

The IRS used to use the Consumer Price Index (CPI) to calculate the past year’s inflation. However, with the Tax Cuts and Jobs Act of 2017, the IRS will now use the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly. Below see the updated tax brackets for 2019.

Income Tax Brackets and Rates

In 2019, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Tables 1). The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $510,300 and higher for single filers and $612,350 and higher for married couples filing jointly.

Table 1. Tax Brackets and Rates, 2019

Rate	For Unmarried Individuals, Taxable Income Over	For Married Individuals Filing Joint Returns, Taxable Income Over	For Heads of Households, Taxable Income Over
10%	$0	$0	$0
12%	$9,700	$19,400	$13,850
22%	$39,475	$78,950	$52,850
24%	$84,200	$168,400	$84,200
32%	$160,725	$321,450	$160,700
35%	$204,100	$408,200	$204,100
37%	$510,300	$612,350	$510,300

Standard Deduction and Personal Exemption

The standard deduction for single filers will increase by $200 and by $400 for married couples filing jointly (Table 2).

The personal exemption for 2019 remains eliminated.

Table 2. 2019 Standard Deduction and Personal Exemption

Filing Status	Deduction Amount
Single	$12,200
Married Filing Jointly	$24,400
Head of Household	$18,350

 

How do I file a tax extension for 2019?

Today is the deadline for filing and paying 2018 federal income taxes.  Any filings after today that are not on extension will be considered late and subject to penalties and interest assessments.   Remember if you mail in your return, it must be postmarked today, so make sure that the mailing service you are using whether it be the US Postal service drop-off or other have a collection time that will meet the April 15th postmark deadline.

In the event that you cannot file your tax return by the deadline, you need to file for a tax extension, which is also subject to the above April 15th postmark deadline.  To get a filling a tax extension, you will need to submit Form 4868(Application for Automatic Extension of Time To File U.S. Individual Income Tax Return).

The IRS also allows you to get an extension by paying all or part of your estimated income tax due and indicate that the payment is for an extension using Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or a credit or debit card.  This way you won’t have to file a separate extension form and you will receive a confirmation number for your records.

It is important to note that, an extension to file will give you six more months to file your taxes, until Oct. 15. It does not however, give you extra time to pay your taxes.  You still must estimate and pay what you owe by April 15.  You will be charged interest on any amount not paid by the deadline.  Below are the 2018 Income Tax Brackets to assist you estimate how much money you will need to send (if any) along with your Form 4868.

2018 Income Tax Brackets and Standard Deduction Rates

Table 1. 2018 Income Tax Brackets and Rates

 

Table 2. 2018 Personal Exemption and Standard Deduction

The personal exemption for 2018 is eliminated

 

 

 

The Tax Cuts and Jobs Act (TCJA) was signed into law by President Donald Trump on December 22, 2017.  The TCJA has brought with it many sweeping changes to a broad part of the tax code. Some of the notable changes include:

(1) Elimination of personal exemptions – previously taxpayers were allowed to subtract $4,500 from their income as a personal exemption.

(2) Elimination of the “personal mandate” enforced by the Affordable Care Act (known more commonly by many as “Obamacare”) – it is important to note that the elimination of this penalty did not go into effect until January 1, 2019. Hence, if you failed to obtain “qualifying health coverage” in 2018, the IRS will assess the penalty.

(3) Expansion of the Child Tax Credit – the TCJA increased the Child Tax Credit from $1,000 to $2,000. The income level at which point the tax credit phases out has been raised from $110,000 to $400,000 for married tax filers. The age cut-off stays at 17 (child must be under 17 at the end of the year for taxpayers to claim the credit).  The refundable portion (applicable to parents who do not earn enough income to pay taxes) of the credit is limited to $1,400.  This amount will be adjusted for inflation after the 2018 tax year.

(4) Standard deduction for single filers increased by $5,500 and by $11,000 for married couples filing jointly (see Table 2 below).  Most itemized deductions eliminated.

(5) Mortgage Interest Deduction Reduced (learn more).

(6) If you’re caring for an elderly parent, you can get a $500 credit for each non-child dependent.

(7)  Tax table changes (see Table 1 below)

To protect individuals that are pushed into higher income tax brackets due to reduced value from credits and deductions instead of increase in real income (known as “bracket creep”), the act also requires that the IRS adjust numerous tax provisions for inflation.

2018 Income Tax Brackets and Standard Deduction Rates

Table 1. 2018 Income Tax Brackets and Rates

 

Table 2. 2018 Personal Exemption and Standard Deduction

The personal exemption for 2018 is eliminated

 

 

 

2018 Home Mortgage Interest Deduction

President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA) on December 22, 2017.  With its passage many important changes and revisions were made.  Once such item that has undergone some important changes is the,”home mortgage interest deduction”.   The IRS has long incentivized home ownership by offering taxpayers a tax deduction for mortgage interest.  This long-standing tax perk has fueled one of the cornerstones of the “American Dream”, home ownership!

Under the Tax Reform Act of 1986, home mortgage interest was allowed only up to $1,000,000 of debt principal that was used to acquire, build, or substantially improve a principal residence or a second home; and the debt was secured by that residence respectively.  However, under the TCJA, the limits on itemized mortgage interest deduction have been reduced to $750,000.  Notably, existing home owners are grandfathered in under the older $1,000,000 limit.  Furthermore, there is one important tidbit to consider, and that is the ever confusing IRS terminology, in this particular case – “acquisition indebtedness”.   Taxpayers are responsible for determining how much of their mortgage interest is or isn’t deductible based on this IRS jargon if you will, of acquisition indebtedness.  And of course, to add anxiety and confusion to the taxpayer the IRS expects the taxpayer to keep extensive records on how the mortgage proceeds were actually used, irregardless of how the loan is structured or what the lender calls it.

Further complicating the matter, the passing of the TCJA has completely eliminated the ability to deduct interest on home equity indebtedness, hence taxpayers need to inform themselves as to what exactly the IRS determines are these types of loans by their standard.  This is effective for 2018 and beyond there are no grandfathering provisions for existing home equity debt.

Don’t be to eager to deduct the mortgage interest (if any) on your second home, especially if you rent out the second home.  To qualify for this deduction there are a variety of rules and many times it is best to consult a tax professional like TaxPM who can determine how much(if any) of the mortgage interest can be deducted for a second home, and if it in fact falls into the “home mortgage interest deduction” or otherwise needs to be treated differently per the tax code.  Also be aware that the rules and difficulty to ascertain the deduction change substantially if you rent the second home for more than 14 days.

In closing, one would hope that it would be as simple as receiving a mortgage interest statement and reporting that number directly on the tax return – well it’s not that simple. Although there are many potential tax breaks with owning a home, like, home mortgage interest deduction, taxpayers need to pay close attention to the rules and changes that were adopted by the new tax code with the passing of the Tax Cuts and Jobs Act (TCJA).