The changes to the Internal Revenue Code (I.R.C.) for 2019 are certainly less extensive than the ones made for 2018. Nevertheless, some significant alterations and adjustments to the I.R.C. are evident this year. 

Just a reminder as you read this guide: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.

Tax Season Deadlines

Thursday, January 31

*W-2 and 1099-MISC forms must be supplied to employees by this deadline (W-2s to all employees; 1099-MISCs to any independent contractors and vendors who performed work for your business in 2018).

*W-2 and 1099-MISC summation form filing deadline for employers and small businesses. W-2s + linked Form W-3 go to the Social Security Administration, 1099s + linked Form 1095 to the I.R.S.

* Form 940 (Federal Unemployment Tax Report) and Form 941 (Employer’s Quarterly Federal Tax Form) are also due to the I.R.S. on this date.1,2,3

Friday, February 15

*Deadline to pay employee bonuses that qualify toward 2018 business taxes.2

Friday, March 15

* Deadline for calendar-year S corporations to file Form 1120S.

> The extended deadline: September 16.2

*Deadline for partnerships to file Form 1065.

> The extended deadline: September 16.2

Monday, April 15

*Federal income tax deadline for individuals and sole proprietors.

> The extended deadline: October 15.2

*Form 1120/1120s filing deadline for calendar-year C corporations.

> The extended deadline: October 15.2

*Form 1041 filing deadline for trusts and estates.

> The extended deadline: October 1.4

*Deadline to make 2018 IRA contributions to retirement plans for TY 2018.5

Wednesday, May 15

*Form 990 filing deadline for tax-exempt organizations (qualified nonprofits and charities).

> The extended deadline: August 15.2

Wednesday, July 31

*Form 5500 filing deadline for calendar-year employee benefit plans

> The extended deadline: October 15.6

Tax Changes & COLAs for Households

Here are some notable changes affecting individual taxpayers this year (the changes are far less seismic in 2019 than those brought about in 2018 by the Tax Cuts & Jobs Act).

Just a reminder as you move to this new section on Tax Changes & COLAs for Households. This guide is not intended to provide tax or legal advice. Be sure to consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.

1 Income tax brackets have been adjusted for inflation.

The I.R.S. has made some 2019 cost-of-living adjustments, or COLAs, resulting in slightly altered taxable income thresholds:

Bracket          Single Filers                      Married Filing Jointly or Qualifying Widower

10%                $0 – $9,700                       $0 – $19,400

12%                $9,701 – $39,475              $19,401 – $78,950

22%                $39,476 – $84,200           $78,951 – $168,400

24%                $84,201 – $160,725         $168,401 – $321,450

32%                $160,726 – $204,100       $321,451 – $408,200

35%                $204,101 – $510,300       $408,201 – $612,350

37%                $510,301 and up              $612,351 and up

Bracket          Married Filing Separately                Head of Household

10%                $0 – $9,700                     $0 – $13,850

12%                $9,701 – $39,475           $13,851 – $52,850

22%                $39,476 – $84,200         $52,851 – $84,200

24%                $84,201 – $160,725       $84,201 – $160,700

32%                $160,726 – $204,100    $160,701 – $204,100

35%                $204,101 – $306,175    $204,101 – $510,300

37%                $306,176 and up            $510,301 and up

The thresholds for these brackets are roughly 2% higher than in 2018.7

2 The standard deduction has increased a bit.

Another COLA here. The increase ranges from $200-$400, depending on filing status.

*Single filer: $12,200 (instead of $12,000)

*Married couples filing separately: $12,200 (instead of $12,000)

*Head of household: $18,350 (instead of $18,000)

*Married couples filing jointly & surviving spouses: $24,400 (instead of $24,000)

The additional standard deduction is $1,300 this year for single filers who are blind or aged 65 or older (and $1,650 for unmarried taxpayers blind or aged 65 or older). A person who is claimed as a dependent on another taxpayer’s 1040 form for 2019 can take a standard deduction of either a) $1,100 or b) the sum of $350 + that person’s earned income, whichever is greater.7

3 AMT exemption amounts have also received a COLA.

The Tax Cuts & Jobs Act made the exemption amounts for the Alternative Minimum Tax permanently subject to inflation indexing. Here are the inflation-adjusted exemption amounts for 2019.

*Single filer or head of household: $71,700

*Married couples filing separately: $55,850

*Married couples filing jointly & surviving spouses: $111,700

*Trusts and estates: $25,000

How about the thresholds where these exemptions begin to phase out? For 2019, they are set now at $510,300 for individuals and $1,026,000 for joint filers.7,8

4 The Affordable Care Act penalty for not having health insurance has been cut to $0.

Technically, the penalty linked to the ACA individual mandate is not “gone” – but it is suspended for 2019, and perhaps, years to come. This development does not necessarily mean that if you go without health insurance, you will face no penalty this year. In some states (such as New Jersey), legislatures are considering or approving bills to impose state fines on uninsured taxpayers.

The other provisions and stipulations of the ACA remain in place, including the employer shared responsibility provision and the requirement for self-insured employers to report worker coverage using Form 1095-C or Form 1095-B.9

5 The AGI threshold for the qualified medical expense deduction has risen.

This itemized deduction provides a significant tax break for some households. It permits a taxpayer to deduct out-of-pocket medical (and dental) expenses exceeding a percentage of adjusted gross income (AGI). For 2018, the percentage threshold was set at 7.5% of AGI. This year, it climbs to 10%, meaning this deduction will be reduced.7

6 The federal tax treatment of alimony payments has changed.

Should you happen to divorce this year, any alimony paid to you in the wake of a divorce finalized on or after January 1, 2019 will be considered tax-exempt income. That is a change from 2018 and before, when alimony received was defined as taxable income.

Before 2019, alimony payments made from a higher-earning ex-spouse to a lower-earning ex-spouse were tax deductible. Now, that is no longer the case, unless the payments result from a divorce finalized before January 1, 2019.10

7 Contribution limits on many retirement plans have increased this year.

For Roth and traditional IRAs, the annual contribution limit is now $6,000 (rising by $500 in 2019, the first increase in six years), with the usual $1,000 “catch-up” contribution allowed for IRA owners 50 and older. Roth IRA contributions cannot be made by taxpayers with high incomes. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.11

Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 591/2, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70 1/2, you must begin taking required minimum distributions.11

For employer-sponsored retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan (TSPs), the annual contribution cap is now $500 higher at $19,000, with the “catch-up” contribution permitted for plan participants 50 and older remaining at $6,000. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.11

TSP follow the same contribution guidelines as 401(k)s. However, the total amount a TSP member can contribute in any given year is up to $54,000 under the Maximum Annual Addition Limit11

Yearly contribution limits for SIMPLE retirement accounts also rise by $500 for 2019, to $13,000. The annual catch-up contribution limit for older plan participants is unchanged at $3,000. Distributions for SIMPLE-IRAs and solo 401(k) are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. The penalty may be as much as 25% if a withdraw is taken the first two years of plan participation. A SIMPLE-IRA is only available to businesses with 100 or fewer employees who earned at least $5,000 in the prior year. To use a SIMPLE-IRA, a business cannot offer any other employer-sponsored retirement plan.11

Self-employed individuals and small business owners may direct employer contributions (as a percentage of salary) of up to $56,000 this year into SEP-IRAs and solo 401(k)s, up from $55,000 in 2018. That is the new annual limit for the amount of money that can be directed into defined contribution plans in 2019. (The annual compensation limit that figures into the savings calculation for such plans increases from $275,000 to $280,000.) Distributions from SEP-IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions. IRAs have exceptions to avoid the 10% withdrawal penalty, including death and disability. Unlike the self-employed 401(k), which is only available to business owners with no employees, you cannot take a loan from your SEP assets11,12

The maximum amount that a defined benefit plan may pay a participant each year rises $5,000 to $225,000 in 2019.11

Are you a business owner whose company has an employee stock ownership plan, or ESOP? You should know that the dollar amount for figuring the maximum account balance in an ESOP subject to a 5-year distribution period is now $1.13 million. The dollar amount used to determine the lengthening of that period is now $225,000.12

In addition to these COLAs:

*Another 2019 COLA affects the definition of a key employee who participates in a top-heavy workplace retirement plan. That cap rises $5,000 this year, to $180,000.

*Similarly, the dollar threshold for the definition of a highly compensated employee in a 401(k) plan heads north by $5,000 to $125,000.12

8 Phase-out ranges affecting Roth and traditional IRA contributions have been altered for 2019.

*Traditional IRA Contribution Deductions When You or Your Spouse Has Access to a Retirement Plan at Work

In 2019, the modified adjusted gross income (MAGI) phase-out ranges are:

*Single filer or head of household: $64,000 – $74,000 ($1,000 higher)

*Married couples filing jointly: $103,000 – $123,000 ($2,000 higher)

*Married couples filing separately: $0 – $10,000 (it never changes)

If your MAGI falls below these phase-out ranges, contributions to a traditional IRA are fully deductible.12

*Traditional IRA Contributions if You Lack Access to a Workplace Retirement Plan, but Your Spouse Has Access to Such a Plan

*Married couples filing jointly: $193,000 – $203,000 ($4,000 higher)

*Married couples filing separately: $0 – $10,000 (it never changes)12

*Roth IRA Contributions

Your ability to make a 2019 Roth IRA contribution is reduced when your MAGI falls into these phase-out ranges. Beyond the high end of these ranges, that ability disappears.

*Single filer or head of household: $122,000 – $137,000 ($2,000 higher)

*Married couples filing jointly: $193,000 – $203,000 ($4,000 higher)

*Married couples filing separately: $0 – $10,000 (it never changes)12   

9 The federal estate and gift tax exemption has also had a COLA.

In 2019, it rises to $11.4 million for individuals, up from the previous $11.2 million. An ultra-wealthy married couple now has a chance to protect up to $22.8 million of their estate from federal death taxes (which can reach 40%), provided the surviving spouse elects to use the late spouse’s unused portion of their estate and gift tax exemption. (According to the Tax Policy Center, less than 2,000 estates were subject to federal death taxes in 2018.)13

10 Capital gains tax thresholds have been adjusted slightly northward this year.

The 2019 capital gains tax brackets are set as follows:

                Bracket            Single Filers                              Joint Filers

                0%                     $0 – $39,375                             $0 – $78,750

                15%                  $39,376 – $434,550                 $78,751 – $488,850

                20%                  $434,551 and up                      $488,851 and up

           Bracket            Heads of Household

                0%                     $0 – $52,750

                15%                  $52,751 – $461,700

                20%                  $461,701 and up

As a reminder, these rates apply to long-term capital gains, which are taxed at different rates and thresholds than regular income.14

11 You can earn slightly more and claim the Saver’s Credit.

The yearly MAGI limit for this tax credit, an incentive to foster greater retirement savings among low-income and moderate-income workers, has risen as follows:

*Single filers and married couples filing separately: $32,000 ($500 higher)

*Head of household: $48,000 ($750 higher)

*Married couples filing jointly: $64,000 ($1,000 higher)12

12 The maximum Earned Income Tax Credit (EITC) has been adjusted for 2019.

This year, the maximum EITC is $6,557 for taxpayers with three or more qualifying children, $5,828 for taxpayers with two or more qualifying children, $3,526 for taxpayers with one qualifying child, and $529 for taxpayers without any qualifying children. These amounts have increased a bit from 2018.14

13 Another COLA concerns the phaseout thresholds for the Lifetime Learning Credit.

This education credit can be as large as $2,000 (that is, the credit can be equal to 20% of the first $10,000 you spend on qualified higher education expenses in 2019). The MAGI phase-out range for single filers and heads of household is $58,001 – $68,000. For joint filers, it is $116,000 – $134,000. Above the high ends of these phase-out ranges, you cannot claim the credit.15

14 Some COLAs apply to the Adoption Credit.

In 2019, the MAGI phase-out range for this tax credit is $211,161 – $251,160; above $251,160, the credit cannot be claimed. The credit maxes out at $14,080 of qualified adoption expenses for a child with special needs this year and $13,810 of qualified adoption expenses for other adoptions.7,16

15 More COLAs apply to Health Savings Accounts and Medical Savings Accounts.

In 2019, the yearly individual and family contribution caps for HSAs are, respectively, $50 and $100 higher, at $3,500 and $7,000. (An additional catch-up contribution of up to $1,000 is permitted for accountholders 55 and older.) As for the high-deductible health plan (HDHP) requirements, the minimum deductible has not changed for 2019 (at least $1,350 for individuals; at least $2,700 for families); the annual out-of-pocket expense limit has risen $100 for individuals, to $6,750, and increased $200 for families, to $13,500.

For MSAs, the criteria for linked HDHPs has changed slightly. The linked HDHP must have a yearly deductible between $2,350-$3,500 for an individual and between $4,650-$7,000 for a family. The maximum out-of-pocket expenses for an individual this year: $4,650. For family coverage: $8,550.5,7

16 The hardship withdrawal rules for 401(k)s have changed.

The Bipartisan Budget Act of 2018 brought some changes following in the path of the Tax Cuts and Jobs Act of 2017. There are three changes to note this year, and they also apply to similar retirement plans in the nonprofit sector.

*Qualified non-elective contributions, qualified matching contributions, and account earnings may all be taken as part of hardship withdrawals from 401(k) plans.

*A 401(k) plan participant may now take a hardship withdrawal without having to take a loan from the plan first.

*Participants in 401(k)s no longer need to wait six months to resume contributing to a plan after taking a hardship withdrawal.

Of course, not all employer-sponsored retirement plans allow hardship withdrawals; those that do allow them are being directed to follow these new rules and amend plan documents.17

17 There are higher limits on the foreign earned income exclusion.

If you earn income while living and working in another country in 2019, and you are eligible to claim the foreign earned income exclusion, you may shield up to $105,900 of such earned income this year. For 2018, the limit was $103,900.7

Tax Changes & COLAs for Businesses

On the business side, not much has changed this year after a truly momentous 2018.

1 Taxable income thresholds pertaining to the 20% deduction of qualified business income have been updated.

Many pass-through business entities will be able to exclude a bit more income from federal taxation in 2019. To be very specific here, Internal Revenue Code Section 199A lets non-corporate taxpayers deduct 20% of their qualified business income (QBI) from a partnership, LLC, or S corporation as well as 20% of the dividends they realize from qualified real estate investment trusts (REITs), cooperatives, and publicly traded partnerships.

Taxpayers who own certain consulting or service businesses (including businesses of this kind in the fields of law, health care, financial services and brokerage services, and athletics) may not fully qualify for the deduction based on their taxable income levels.

The 2019 taxable income thresholds determining eligibility for the Sec. 199A deduction are:

*Single filer or head of household: $160,700 – $210,700

*Married couples filing jointly: $321,400 – $421,400

*Married couples filing separately: $160,725 – $210,72518   

2 The limit on earnings subject to the Social Security payroll tax has increased.

The taxable wage cap is set at $132,900 for 2019. Last year’s cap was $128,400. This $132,900 limit also applies to net self-employment earnings.19,20

3 The standard mileage rate is now $0.58.

This is the mileage rate that pertains to the business use of a motor vehicle and can be used to calculate deductible costs of operating such a vehicle in a business context. Last year, the rate was $0.545 per mile.21

4 Up to $265 per month may now be excluded from a worker’s income for qualified parking benefits.

This is $5 more than in 2019. This $265 monthly limit also applies to monthly employee vanpooling expenses as well as bus and train pass expenses.16

5 The yearly QSHERA reimbursement limit has risen.

Do you own a business that provides tax-free reimbursements of medical expenses for eligible workers via a qualified small employer health reimbursement arrangement (QSEHRA)? If so, note that the payment/reimbursement limit has increased by $100 for self-only coverage (to $5,150) and by $200 for family coverage (to $10,450).16

6 A COLA has been given to the phase-out range for the Small Business Health Care Tax Credit.

If you are a solopreneur or own a small business, note that the phase-out range for this credit applies at $27,100 this year ($500 higher). The top of the phase-out range is now $54,200 (a $1,000 increase from 2018).16

Social Security & Medicare Changes

1 Social Security recipients get 2.8% more in retirement benefits.

This is a COLA in response to inflation and represents the largest annual increase to Social Security payments in seven years. It means that the average monthly Social Security payment will be $1,461 during 2019. The maximum possible payment for those retiring at what the Social Security Administration deems Full Retirement Age (FRA) is now $2,861.1,19

2 The earnings limits for Social Security withholding have increased.

Before and during the year you reach Full Retirement Age (FRA), Social Security withholds some of your benefits when your earned income surpasses certain thresholds. If you were born during 1943-1954, your FRA is 66.

If you receive Social Security retirement benefits and have yet to reach your FRA, you may earn up to $17,640 in 2019 before having $1 in benefits withheld for each additional $2 in earned income above that level. (That is a $600 increase from 2018.)

If you reach your FRA in 2019, you may earn as much as $46,920 before having $1 in benefits withheld for each additional $3 in earned income above that level. (That is a $1,560 increase from 2018.)18

3 2019 brings higher Medicare Part B premiums.

The standard monthly premium is $1.50 higher, at $135.50. All but about 3.5% of Medicare recipients are expected to pay that amount per month for Part B coverage this year. That contrasts with 2018, when most Medicare recipients paid about $130 per month for Part B rather than the standard premium of $134, thanks to Medicare’s “hold harmless” provision.22

4 New income brackets determine the Part B premiums for high earners who receive Medicare.

Last year, monthly Part B premiums ran anywhere from $187.50 to $428.60 for individual Medicare enrollees who earned more than $85,000 and married Medicare enrollees who earned more than $170,000. A new income bracket has been added this year to define who pays the most for Part B (this new bracket complements those already added in 2018). Individual Medicare recipients who earn $500,000 or more in 2019 and married Medicare recipients who earn $750,000 or more in 2019 will pay $460.50 per month for Part B this year. Last year, the top bracket had a much lower threshold: $160,000 for an individual; $320,000 for a married couple.22

5 Medicare’s Part A and B deductibles have risen.

The Part A deductible (for hospital stays) has grown by another $24, to $1,364. (Many Medicare enrollees do not have to pay it, thanks to supplemental insurance coverage.) That deductible covers inpatient days 1 – 60 in a benefit period. During inpatient days 61 – 90, Medicare enrollees face a coinsurance charge; in 2019, that is $341 per day, $6 more than in 2018.

The Part B deductible, which stayed at $183 in both 2017 and 2018, is $185 this year.22

6 Part C plans have become cheaper and more numerous.

Back in September, the Centers for Medicare & Medicaid Services stated that the average monthly Part C plan premium would be roughly $28 in 2019. This is about $1.80 less than in 2018 and furthers a trend of decreasing Part C premiums that started in 2015. At the same time, there are notably more Medicare Advantage plans to choose from this year: the Center puts the number of Part C plans at about 3,700, compared to around 3,100 in 2018.22

7 You might pay a little less for Part D coverage in 2019.

Do you have a standalone Part D plan? The Centers for Medicare & Medicaid Services project that the average basic monthly premium for this type of Part D plan will be about $1.10 lower in 2019 (circa $32.50). If you have an “enhanced” prescription drug plan, however, your premium may be substantially more than that. The annual Part D plan deductible limit rises $10 this year, to $415.22

8 The Part D “donut hole” closes this year, but only for brand-name medications.

Medicare enrollees are paying just 25% of the cost of the brand-name drugs covered by their Part D plans this year. Next year, the donut hole closes for generic drugs; in the interim (that is, this year), enrollees will pay 37% of the cost of generics listed on their Part D plan’s formulary.22

Other Interesting Developments

1 The new 1040 form is the size of a (very large) postcard.

Measuring 5″ x 7.5″, it is two-sided. In tandem with the new 1040, taxpayers may need to use up to six new schedules (named Schedule 1, 2, 3, 4, 5, and 6) and/or the traditional “alphabet” schedules to fully detail their 2018 tax picture, whether they file electronically or submit a paper return. The 1040A and 1040EZ forms have been discontinued.23

2 A new W-4 form is in the works for 2020.

The I.R.S. released the 2019 Form W-4 in December, and it differed only marginally from the 2018 version. The agency needs to overhaul the form in the wake of the Tax Cuts & Jobs Act, and according to an article at the website of the Society for Human Resources, the revamped 2020 W-4 will likely be unveiled during the first quarter of 2019. (One expected change: workers will state a specific dollar amount they want withheld for a calendar year, replacing withholding allowances.)19

This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. Both Beechwood Financial and MarketingPro, Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Neither Beechwood Financial nor MarketingPro, Inc. assume any obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.

This material was prepared by MarketingPro, Inc. for use by Beechwood Financial.

Citations.

1 – cnbc.com/2019/01/08/irs-confirms-tax-season-to-start-jan-28-despite-government-shutdown.html [1/8/19]
2 – blog.indinero.com/2019-business-tax-deadlines [6/1/18]
3 – thebalancesmb.com/payroll-tax-deadlines-for-january-and-february-3974577 [1/4/19]
4 – taxact.com/support/24459/2018/irs-filing-deadlines [1/10/19]
5 – trustetc.com/resources/investor-awareness/contribution-limits [11/1/18]
6 – shrm.org/resourcesandtools/hr-topics/benefits/pages/agencies-preview-form-5500-for-2019-filings-while-revamp-delayed.aspx [11/26/18]
7 – forbes.com/sites/kellyphillipserb/2018/11/15/irs-announces-2019-tax-rates-standard-deduction-amounts-and-more [11/15/18]
8 – fool.com/taxes/2018/12/15/your-2019-guide-to-the-alternative-minimum-tax.aspx [12/15/18]
9 – paychex.com/articles/compliance/aca-individual-mandate-penalty-reduced-2019 [12/21/18]
10 – foxbusiness.com/business-leaders/amazon-ceo-jeff-bezos-divorce-subject-to-these-tax-changes [1/10/19]
11 – forbes.com/sites/ashleaebeling/2018/11/01/irs-announces-2019-retirement-plan-contribution-limits-for-401ks-and-more/ [11/1/18]
12 – irs.gov/newsroom/401k-contribution-limit-increases-to-19000-for-2019-ira-limit-increases-to-6000 [11/27/18]
13 – forbes.com/sites/ashleaebeling/2018/11/15/irs-announces-higher-2019-estate-and-gift-tax-limits [11/15/18]
14 – taxfoundation.org/2019-tax-brackets [11/28/18]
15 – thebalance.com/lifetime-learning-tax-credit-3192933 [1/11/19]
16 – tinyurl.com/ycdgvpr5 [1/14/19]
17 – investrustwealthmanagement.com/2018/09/27/what-are-the-new-rules-for-401k-hardship-withdrawals/ [9/27/18]
18 – tax.thomsonreuters.com/news/moves-that-will-maximize-the-new-deduction-for-pass-through-income [12/12/18]
19 – shrm.org/resourcesandtools/hr-topics/compensation/pages/fica-social-security-tax-2019.aspx [12/19/18]
20 – irs.gov/pub/irs-pdf/p334.pdf [2019]
21 – tinyurl.com/ycd6bl8q [12/14/18]
22 – medicareresources.org/faqs/what-kind-of-medicare-benefit-changes-can-i-expect-this-year/ [10/15/18]
23 – forbes.com/sites/howardgleckman/2019/01/15/the-new-1040-will-fit-on-a-big-postcard-but-it-wont-make-tax-filing-any-simpler [1/15/19]

What are the potential benefits? What are the drawbacks?

If you own a traditional IRA, perhaps you have thought about converting it to a Roth IRA. Going Roth makes sense for some traditional IRA owners, but not all.

Why go Roth? There is an assumption behind every Roth IRA conversion – a belief that income tax rates will be higher in future years than they are today. If you think that will happen, then you may be compelled to go Roth. After all, once you are age 59½ and have had your Roth IRA open for at least five years (five calendar years, that is), withdrawals of the earnings from your Roth IRA are exempt from federal income taxes. You can withdraw your Roth IRA contributions tax free and penalty free at any time.1,2

Additionally, you never have to make mandatory withdrawals from a Roth IRA, and if your income permits, you can make contributions to a Roth IRA as long as you live.2

For 2017, the contribution limits are $135,000 for single filers and $199,000 for joint filers, with phase-out ranges respectively starting at $120,000 and $189,000. (These numbers represent modified adjusted gross income.)2

While you may make too much to contribute to a Roth IRA, you have the option of converting a traditional IRA to a Roth. Imagine never having to draw down your IRA each year. Imagine having a reservoir of tax-free income for retirement (provided you follow Internal Revenue Service rules). Imagine the possibility of those assets passing to your heirs without being taxed. Sounds great, right? It certainly does – but the question is: can you handle the taxes that would result from a Roth conversion?1,3

Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side.

A Roth IRA conversion is a taxable event. The I.R.S. regards it as a payout from a traditional IRA prior to that money entering a Roth IRA, and the payout represents taxable income. That taxable income stemming from the conversion could send you into a higher income tax bracket in the year when the conversion occurs.2

If you are nearing retirement age, going Roth may not be worth it. If you convert a large traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion. Model scenarios considering “what ifs” should be mapped out.

In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.

On the other hand, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.

If you aren’t sure which argument to believe, it may be reassuring to know that you can go Roth without converting your whole IRA.

You could do a multi-year conversion. Is your traditional IRA sizable? You could spread the Roth conversion over two or more years. This could potentially help you avoid higher income taxes on some of the income from the conversion.2

Roth IRA conversions can no longer be recharacterized. Prior to 2018, you could file a form with your Roth IRA custodian or trustee to undo a Roth IRA conversion. The recent federal tax reforms took away that option. (Roth IRA conversions made during 2017 may still be recharacterized as late as October 15, 2018.)2

You could also choose to “have it both ways.” As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.

If you do go Roth, your heirs might receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. If I.R.S. rules are followed, Roth IRA heirs may end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, distributions of inherited assets from a traditional IRA are routinely taxed.3

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – cnbc.com/2017/07/05/three-retirement-savings-strategies-to-use-if-you-plan-to-retire-early.html [7/5/17]
2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [3/26/18]
3 – time.com/money/4642690/roth-ira-conversion-heirs-estate-planning/ [1/27/17]

 

The answer depends on your income.

 

Your Social Security income could be taxed. That may seem unfair, or unfathomable. Regardless of how you feel about it, it is a possibility.

Seniors have had to contend with this possibility since 1984. Social Security benefits became taxable above certain yearly income thresholds in that year. Frustratingly for retirees, these income thresholds have been left at the same levels for 32 years.1

Those frozen income limits have exposed many more people to the tax over time. In 1984, just 8% of Social Security recipients had total incomes high enough to trigger the tax. In contrast, the Social Security Administration estimates that 52% of households receiving benefits in 2015 had to claim some of those benefits as taxable income.1

Only part of your Social Security income may be taxable, not all of it. Two factors come into play here: your filing status and your combined income.

Social Security defines your combined income as the sum of your adjusted gross income, any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of modified adjusted gross income, or MAGI.)2

 

What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive.2

You may be able to estimate these taxes in advance. You can use an online calculator (a Google search will lead you to a few such tools), or the worksheet in IRS Publication 915.2

You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 25% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2

Did you know that 13 states also tax Social Security payments? North Dakota, Minnesota, West Virginia, and Vermont use the exact same formula as the federal government to calculate the degree to which your Social Security benefits may be taxable. Nine other states use more lenient formulas: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, and Utah.2

What can you do if it appears your benefits will be taxed? You could explore a few options to try and lessen or avoid the tax hit, but keep in mind that if your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, though, some moves might help.

If you have a number of income-generating investments, you could opt to try and revise your portfolio, so that less income and tax-exempt interest are produced annually.

A charitable IRA gift may be a good idea. You can make one if you are 70½ or older in the year of the donation. You can endow a qualified charity with as much as $100,000 in a single year this way. The amount of the gift may be used to fully or partly satisfy your Required Minimum Distribution (RMD), and the amount will not be counted in your adjusted gross income.3

You could withdraw more retirement income from Roth accounts. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax-exempt as long as you are age 59½ or older and have held the account for at least five tax years.4

Will the income limits linked to taxation of Social Security benefits ever be raised? Retirees can only hope so, but with more baby boomers becoming eligible for Social Security, the IRS and the Treasury stand to receive greater tax revenue with the current limits in place.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – ssa.gov/policy/docs/issuepapers/ip2015-02.html [12/15]
2 – fool.com/retirement/general/2016/04/30/is-social-security-taxable.aspx [4/30/16]
3 – kiplinger.com/article/retirement/T051-C001-S003-how-to-limit-taxes-on-social-security-benefits.html [7/16]
4 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [1/26/16]

Don’t let these slip-ups creep into your federal tax return.

  

No one wants to delay their federal tax refund. As you certainly don’t, filling out your 1040 form correctly is essential. To that end, it is worth noting some of the common 1040 mistakes – the little slip-ups that aggravate both the IRS and the taxpayer.

Not signing your return. If you file online (and who doesn’t), you have to type your name on the “Your Signature” line in the “Sign Here” section, along with your spouse’s name if you file jointly. If you still file a hard-copy return, you’ve got to sign your name on the “Your Signature” line, and the same goes for your spouse on the “Spouse’s signature” line. No valid signature equals an invalid return.

Not getting your name right. Believe or not, some people mistype their names as they e-file. More commonly, they enter an old name – a maiden name, for example – that doesn’t match the name linked to this taxpayer identification number. If you’ve changed your name, the Social Security Administration (and other federal agencies, as applicable) need to know that.1

Missing the filing deadline(s) applicable to you or your business. Is your company an S corp? That means you will probably need to file a Form 1120S by March 15. Is it a sole proprietorship? That means you have until April 15 to file a Form 1040C. If you are new to making estimated tax payments, you have hopefully pored over Form 1040-ES with a tax professional to figure out how much tax is due by each quarterly payment period.2

Turning in Form 4868 (the “extension”) gives you until October 15 to file, although any federal taxes owed must still be paid by April 15. If you are a servicemember on duty outside the U.S. and Puerto Rico, you have until June 15 to file your return and pay taxes, and you can also use Form 4868 to file as late as October 15.3

If you file late (that is, you submit your return after April 15 without using Form 4868 to request an extension), you face a penalty – a 5% penalty per month following the return’s due date, capping out at a 25% maximum penalty after five months. The penalty for unpaid taxes is .5% per month after the April 15 deadline, and 6% interest a year. If you have taxes a year overdue, you will be assessed both the monthly and yearly penalties.2

Making numerical errors. Even with some of the great tax prep software now available, math errors still happen. In fact, they happen largely because people don’t use the software: the taxpayers who insist on filing paper returns are 20 times more likely to commit math mistakes than those who e-file, the IRS reports.1

If an electronically filed return contains a math mistake, it gets sent back to the taxpayer or tax professional for correction and resubmission. If a paper return has a math mistake, the IRS has to refigure it on the taxpayer’s behalf. That takes time.1

Additionally, some taxpayers get Social Security numbers wrong – not necessarily their own, but those of their spouses. Also, a smooth direct deposit of a federal tax refund won’t happen if a taxpayer types in an inaccurate bank account number.1

Selecting the wrong filing status. This happens a lot with divorced moms and dads. To determine if they should check the “head of household” box or the “single” box, they should take the online interview at irs.gov/uac/What-is-My-Filing-Status%3F.4

Claiming a credit or deduction you shouldn’t. Again, tax prep software tends to ward off this mistake. Credits often inappropriately claimed (or ignored): the Child and Dependent Care Credit, the Earned Income Tax Credit and even the standard deduction.1

Many business owners overlook deductions or claim them in error. Sometimes this can be traced back to slipshod recordkeeping; other times, it stems from faulty assumptions. According to a survey from small business accounting software maker Xero, the most common merited deductions that aren’t claimed by SBOs are those for depreciation (30%), out-of-pocket capital expenses (29%) and car and truck expenses (16%).2

Claiming employees as independent contractors. Some small business owners try to save money by doing this, but the IRS may disagree with such claims. If so, the business can end up on the hook for employment taxes related to that employee.2

So what steps can you take to try and reduce the risk of errors on your 1040 form? You can file electronically, you can use some of the terrific tax prep software available, and you can turn to a skilled tax professional to help you prepare and file your return. No one is perfect, but those are all good moves to make this tax season.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – money.cnn.com/gallery/pf/taxes/2014/04/08/tax-mistakes/index.html [4/8/15]
2 – nerdwallet.com/blog/small-business/5-frequent-small-business-tax-mistakes-avoid/ [10/15/14]
3 – irs.gov/taxtopics/tc304.html [1/16/15]
4 – irs.gov/uac/What-is-My-Filing-Status%3F [1/12/15]