As the economic impact of COVID-19 lingers and an impending second wave is on everyone’s mind, Congress is already thinking of new legislation to stimulate the economy. One of the ideas on the top of the list is an expansion of the Research and Development (R&D) tax credit as part of the next COVID-19 relief bill.

Proposals for the R&D Tax Credit

There are numerous proposals for changing the R&D tax credits. It is seen as an investment in the U.S. economy, with some believing the credit is an effective tool to combat offshoring. Some of the main proposals for changes to the R&D tax credit include:

• Doubling the current credit
• Giving businesses the ability to immediately use the credit instead of having carryforward credits
• Expanding the credit for domestic manufacturing
• Increasing the refundable amount for startups

Will My Business Qualify?

The best candidates for R&D tax credit are companies that operate in the following spaces: manufacturing, architecture, engineering, construction, software, life sciences, and medical devices. The key determinate is whether your company makes or improves something; this will give you the best chance to qualify.

Contractors

There is a misconception that if your business is hired or contracted to perform work for other organizations that you cannot qualify for the R&D tax credit. This is not necessarily true; contractors (especially government contractors) can qualify if they have both economic risk and retain substantial rights as contractors.

Startups

The R&D tax credit is refundable in part (against employer payroll tax) for startups. The idea is to expand the refundability so that the credit can be offset against more than just payroll taxes and even perhaps to make it refundable (to some degree) in general. The idea here is that startups won’t be forced to carryforward credits for years and can then reinvest the cash flow to accelerate growth and job creation.

Internal Use Software

Internal use software is software that companies develop themselves. It can be stand-alone software or modifications to existing systems through substantial improvements, the development of add-ons or modules – the idea is to expand the space of what qualifies for the credit for internal-use software. This would allow companies that traditionally wouldn’t have qualified (such as financial institutions, banks, and retail stores) to now potentially be eligible.

Conclusion

This next relief package is likely to be considered prior to the summer congressional recess. Many analysts believe the bill will focus on provisions that help businesses hire back laid-off workers, retain current employees, and grow over the long-term. It’s likely the R&D tax credit will play a key role in the latter objective.

The HEROES Act, otherwise known as the Health and Economic Recovery Omnibus Emergency Solutions Act, can greatly improve the benefits for the earned income tax credit (EITC) for eligible workers who don’t have children. This legislation would also help wage earners in the business-to-consumer and leisure sectors of the economy impacted severely by the coronavirus pandemic.

Looking at the HEROES Act legislation and how it would help childless wage earners, we need to examine the rules surrounding the EITC and how many additional filers may qualify. While childless students pursuing formal education are still required to be 25 for EITC eligibility, filers as young as 19 (down from 25 years old), as well as filers aged up to 67 (up from 64), are now able to apply for the childless EITC. This legislation would also increase the credit’s ceiling to $1,487, from $538.

Looking at these proposed amendments to the tax code, this would act as a one-time stimulus to the economy when the credit is disbursed to eligible filers, specifically focused on low-income wage earners. Based on a review by the Tax Policy Center, 75 percent of the benefits created by the HEROES Act legislation for the EITC would be directed toward the lowest fifth of U.S. earners. Sectors of the economy that will benefit from this effect include health care, manufacturing, construction, and professional services.

However, there is one consideration that must be taken into account, especially in periods of low economic growth. If eligible wage earners see their earnings fall, then the EITC also will become smaller. There is a possibility that the U.S. House and Senate may work together to modify this legislation to speed up or get rid of the phasing-in process, thereby correcting this flaw.   

Another piece of the HEROES Act changes how people can claim the EITC when they file their 2020 taxes. The legislation will allow filers to claim their EITC according to their 2019 or 2020 income, permitting filers to choose the tax year that gives them a more favorable credit. This takes inspiration from other tax years when victims of natural disasters were able to obtain more favorable tax credits. The HEROES Act will give this choice of tax years to all filers eligible for the EITC, not exclusively for childless workers.

Regardless of the process, this could aid in stabilizing economic conditions now or in the future, regardless of why the economy suffers. This is because this legislation would ensure a falling EITC doesn’t increase a wage earner’s overall losses.

Making this type of change to how the EITC is awarded to childless workers would give greater certainty for more predictable financial help and streamline things for legislators and government officials to distribute monies during the next economic downturn.

No matter what form this legislation ultimately takes, if and when it’s signed into law, there are other pieces of legislation containing similar amendments to the EITC found within the HEROES Act. Elements proposed for improving the EITC for eligible filers are contained within the Working Families Tax Relief Act, the Middle-Class Act, and the Cost-of-Living Refund.

The CARES Act stimulus package substantially relaxed the rules around certain retirement account loan and distribution requirements, but with much confusion. As a result, the IRS recently put out a FAQ document to address the COVID-19 rule relaxation around IRA and 401(k) loans and distributions. This important information should come as welcome news for the nearly one percent of all retirement plan holders who have already taken a distribution under the new rules, according to Fidelity Investments.

Who’s eligible?

If you, a spouse or dependent tested positive for COVID-19, you automatically qualify. You also may qualify under less direct circumstances, such as experiencing economic hardship due to being quarantined, laid off, receiving a reduction in work hours, or missing work because you don’t have childcare. Business owners who are forced to close or reduce operating hours also qualify.

How Much Can I Take Out?

COVID-19 impacted individuals can take up to $100k in distributions without paying the 10 percent penalty imposed on early withdrawals by people under 59 1/2 years old. The $100,000 limit is the total for all the plans you have. For example, if you take $70k out of your 401(k), you can take only up to $30k out of your IRA under these rules. You will still owe taxes on the distributions as ordinary income; however, you are able to pay the taxes owed over a three-year period.

Can I Pay Myself Back?

The law also allows you to pay yourself back. Taxpayers can replace their distributions if they do so within a three-year timeframe. This means that if you take out a distribution in 2020, start to pay the taxes owed over the three-year rule and then pay back the distribution in 2022, you’ll be able to amend your 2020 and 2021 returns to get a refund, as well as not pay the tax you would have owed in 2022.

How Do Loans Work?

The maximum amount you can borrow increases from $50,000 to $100,000. You also can borrow the entire amount of your plan balance up to this limit (net of any outstanding loans). Moreover, for any loans you already have within the plan, the due date for payments due through the end of 2020 can be postponed for up to one year.

Is There Anything Else I Should Know?

Yes. First, there is more guidance coming from the IRS. Second, if you are eager to know what this formal guidance will look like, you can turn to the Hurricane Katrina relief rules from 2005 as this is what is expected will apply for the COVID-19 measures as well. Lastly, the IRS will generate a new form 8915E where taxpayers will report the repayment of COVID-19 covered distributions.

One of the most important provisions of the CARES Act for small businesses is called the Paycheck Protection Program (PPP). The PPP is a $349 billion program designed to assist small businesses (fewer than 500 employees) facing financial difficulties as a result of the COVID-19 pandemic through specifically structured loans.

The loan program offers funding to cover payroll for up to eight weeks, with the intent of stemming from unemployment. These loans can be forgiven and essentially become a grant if your business meets certain criteria with no need to repay the money.

As the old saying goes, there’s no such thing as a free lunch – or in this case, free government money. There are potential legal risks that could jeopardize the forgivability of the loan.

Conditional Grants

Another way to look at the PPP loans is as conditional grants. The U.S. Small Business Administration (SBA) notes that loans will be forgiven in full if the funds are used for appropriate costs. Covered costs include payroll, mortgage interest, rent, and utilities. Further, the payroll costs must account for at least 75 percent of the loan proceeds used. The employer needs to maintain or quickly rehire employees and maintain wage and salary levels in order to receive 100 percent forgiveness.

The Devil’s in the Certification Details

The loan application process requires certain certifications. Businesses that are still operating need to certify that the current economic uncertainty makes the loan necessary to keep operations going.

If this seems vague, it’s because it is. There probably isn’t a small business out there that is not facing significant uncertainty in the current climate. The problem is that the certification standard the PPP lays out is extremely subjective. As a result, with the encouragement for businesses to apply, many may do so under the impression that they will have their loan fully forgiven to only run into trouble later if they don’t meet the certification standards.

Legal Risks

By not providing any definition about the nature or extent of the required impact to operations that would make the loan request “necessary to support ongoing operations,” the SBA is making both applicants and lenders apprehensive.

Some law firms are even warning clients via their newsletters about potential legal exposure under the False Claims Act (FCA). Legal counsels are cautioning that a misrepresentation included in an application could result in FCA liability. Businesses must navigate between being as aggressive as possible to bolster their application while staying within the rules of the program.

More Certification Guidance is Needed

The government agencies involved need to provide more clear and objective guidance on the conditions needed to meet the certification requirements of the loan application process. Without clear and definable guidance as to what constitutes facing economic uncertainty, small businesses could face problems in the future.

Objective criteria such as a percentage of revenue decline or order capacity would provide a rather bright-line test and give both guidance to businesses and confidence in the process. 

During the holiday season in December, Congress passed the Consolidated Budget Appropriations Act of 2020. Included in this Act was a tax package that renewed more than 24 tax provisions through what are known as extenders. An extender makes a tax provision effective retroactively. Some of the extender provisions are rather esoteric, so we’ll only focus on those most applicable to the broader taxpayer base.

Extenders in More Detail

Among the widely applicable extender provisions, there are the following. It’s best to check with your tax professional to see which of the more than two dozen extenders may apply to your personal situation.

• Deducting PMI (private mortgage insurance) if you itemize
• The delusionality of some types of tuition and fees
• The ability to exclude debt forgiveness on a qualified residence

Wait, I Don’t Understand What Happened?

Most people are probably wondering at this point how they can obtain the benefit of these retroactive changes, which were not allowed when they filed their original 2018 tax return. The answer is to file an amended tax return – or Form 1040X.

Taxpayers often need to file an amended return when they receive updated or changed inputs, such as when a brokerage sends a corrected Form 1099. Unlike this situation where the basis of your filing changed due to updated information, with the extenders you’ll only want to file if it’s to your benefit.

But Do I Have to File an Amended Return?

Tax law does not actually require that a taxpayer file an amended return when learning the original return submitted did not reflect the correct amount of tax. The assumption is that it was correct the first time. Amendments are allowed, but they are not mandatory.

If you do choose to file an amended return, you have to adjust everything to reflect the tax law and any changes in the information received. You are not allowed to pick and choose only the favorable difference between the original and amended filing.

OK, But Should I File an Amended Return?

The answer to this question is probably a tax accountant’s favorite – it depends.

The most frequent worry among taxpayers is that filing an amended return will trigger an IRS audit. This fear arises from the fact that generally returns are filed and processed electronically, but all amended returns are processed by live people. The biggest risk here is to not include a full explanation of the changes in the return, including what is different, why it’s changed, and the basis for the difference.

Refund or No Refund – Does it Matter?

Another question that often perplexes taxpayers is whether they should file an amended return if doing so will not result in an additional refund. Just because your amended tax return won’t result in a check in your mailbox, there are situations where it’s still to your benefit. One example is if the amended return will increase your capital or passive loss carryforwards.

The Sands of Time

Since amended returns are processed by people and not electronically, the turn-around time is a bit longer than most returns. The IRS says amended tax returns typically take eight to 12 weeks, but it’s often longer.

Conclusion

While you might not have to file an amended return, it could be to your benefit from either the tax extenders, corrected information that arrived after your initial filing or a combination of both. Every taxpayer situation is different, so it’s best to consult us.

How it All Started

Back in July of 2019, France passed what was dubbed a “digital tax” targeting the largest tech companies. Impacting approximately 30 big companies such as Amazon, Google, Facebook and Apple, the tax applies to revenues earned from digital services of companies that earn more than $830 million in total and at least $27.86 million in France. The tax levy is a 3 percent charge on revenue from digital services.

The United States soon responded with threatening 100 percent tariffs on certain classes of French luxury goods, such as wine, champagne, cheese and makeup. These tariffs were estimated to cover more than $2.4 billion in French goods per year.

Responses on Both Sides

French President Emmanuel Macron came out to comment that the digital tax is not intended to be an anti-American move, and that big tech companies of all stripes could be covered by the tax. The criteria that determines who is subject to the digital tax, however, means that essentially only American companies are the ones being taxed.

Some in the United States claim it’s as simple as jealously over our strong technology sector, while others say that the main motivation for the French tax is a need to mitigate burgeoning budget deficits.

President Trump’s Reaction

Rarely one to back down on international trade issues, President Donald Trump criticized the digital tax for unfairly targeting American tech companies, going so far as to call out the European Union as behaving worse than China in its trading relationship with the United States. He reiterated his stance that he’s willing to fight tariffs with tariffs.

Negotiations with the EU

U.S. and European Union officials are negotiating an agreement over taxing big tech, but that didn’t stop the current treasury secretary from threatening more retaliatory tariffs. Steven Mnuchin, the treasury secretary, recently said that the United States will impose new tariffs on French automobile imports if the issue isn’t resolved to America’s satisfaction. He claimed the digital tax is purely arbitrary, hence his random call for taxing automobiles in response. Moreover, Mnuchin called the tax “discriminatory in nature” at the World Economic Forum in Davos Switzerland.

Taxes and Tariffs on Hold

For now, France is delaying the implementation of its digital tax through the end of 2020 in response to U.S. pressure on threatened luxury goods and automobile tariffs. They aim to come to a resolution before year-end with the Trump administration. French Finance Minister Bruno Le Maire is optimistic an agreement can be worked out and believes entering a trade war with the United States would be foolish.

The Future

Currently, other European countries, including Britain and Italy, are acting against big tech companies they believe don’t pay their fair share of taxes to their countries. Treasury Secretary Mnuchin said that the United States is willing to go to bat and protect its companies with retaliatory tariffs in these cases as well. For now, not much is settled – but we should see a clearer direction before the year is out.

Starting a side hustle today is easier than ever. Between the numerous websites that act as marketplaces and project jobs that can be found on the internet, almost anyone can turn a skill or hobby they have into something they can make money off. Many people who do this are just looking to make a little extra money on the side, but this side hustle can turn into something bigger – and this is where the tax and legal questions come in.

Sole Proprietorship

For someone just starting or looking to make a little extra on the side, there’s nothing special you need to do when it comes to filing your federal taxes. Just complete an extra form that is called Schedule C of your personal tax return. This is referred to as doing business as a sole proprietorship.

But that is where the simplicity stops. While organizing your business, the default way as a sole proprietor takes the least effort and expense; however, there are risks associated with this path, particularly legal liability risks.

Legal Risks

The biggest problem is that the sole proprietorships form leaves personal as well as business assets exposed to the risk of being sued. Lawyers will often recommend that the moment a business has paying clients, it should be converted to an LLC or corporation to provide legal protection by separating the business and personal assets.

While this legal advice is technically true, it doesn’t consider the cost-benefit of the situation. The problem is that the costs of forming and running an LLC or corporation can easily exceed the money earned from a side hustle. Combine this with the probability of getting sued at all (in each personal situation) and for most side hustles, it’s simply not worth it to form an LLC or corporation. The key question then is when is it worth it to switch from a sole proprietorship to an LLC or a corporation?

When Side Hustle Grows Up

What about the taxation issue? Generally, tax savings aren’t a good reason to convert a sole proprietorship to an LLC or corporation. Particularly, making the move from a sole proprietorship to a single-member LLC will not help for tax purposes and in fact may only increase your chances of an audit. Moreover, operating as an LLC will cost more both for the initial filing as well as ongoing annual expenses. Legal liability remains the main reason to convert the entity structure.

Hidden Tax Issues

All three pass-through entity types (sole proprietor, LLC and S-Corporations) calculate your income in the exact same way under current laws. There is however a hidden tax to consider: the self-employment tax. Self-employment taxes are paid on all sole proprietor earnings, but only on the salary portion of LLC or S-Corp earnings. Any profits over and above your salary are considered dividend payments and are not subject to self-employment taxes.

Unfortunately, the income level needed to change entity structures depends on each individual situation, but you’ll need the savings to at least cover the initial and long-term compliance costs of filings, fees and tax preparation costs. Let’s look at two examples to see how this works.

Imagine a business is earning $100,000 in net profit and from this, you pay yourself $40,000 as salary and take the remaining $50,000 as dividends. At the current 15.3 percent self-employment tax rate, this translates into a savings of $7,650. Now imagine a side hustle that only earns $25,000 from which you take $15,000 as salary and the remaining $10,000 as dividends. This only translates into $1,530 in tax savings.

In the first case above, you’ve not only generated enough tax savings to more than cover your tax preparation and filing costs, but you’ll end up with more money in your pocket and have stronger legal protection. In the second case, you’ll barely save enough to cover your costs – and you’ll create more work for yourself.

Conclusion

Your side hustle might be small right now, but tomorrow it could grow into the next big thing, so make sure your organizational structure makes sense now.

Beginning on Jan. 1, 2020, the Internal Revenue Service (IRS) has new annual inflation adjustments for tax rates, brackets, deductions, and retirement contribution limits. Note, the amounts below do not impact the tax filing you make in 2020 for the tax year 2019. These amounts apply to your 2020 taxes that you will file in 2021.

2020 Tax Rates and 2020 Tax Brackets

Below are the new 2020 tables for personal income tax rates. There are separate tables each for individuals, married filing jointly couples and surviving spouses, heads of household and married filing separate; all with seven tax brackets for 2020.

Trusts and Estates have four brackets in 2020, each with different rates.

Standard Deduction Amounts

Amounts for standard deductions see a slight increase from 2019 to 2020 based on indexing for inflation. Note that again as in 2019, there are no personal exemption amounts for 2020.

Alternative Minimum Tax (AMT) Exemptions

Like the above, the AMT exemption amounts are increased based on adjustments for inflation, with the 2020 exemption amounts as follows.

Capital Gains Rates

Capital gains rates remain unchanged for 2020; however, the brackets for the rates are changing. Taxpayers will pay a maximum 15 percent rate unless their taxable income exceeds the 37 percent threshold (see the personal tax brackets and rates above for your individual situation). If a taxpayer hits this threshold, then their capital gains rate increases to 20 percent.

Itemized Deductions

Below are the 2020 details on the major itemized deductions many taxpayers take on Schedule A of their returns.

• State and Local Taxes – The SALT deductions also remain unchanged at the federal level with a total limit of $10,000 ($5,000 if you are married filing separately).
• Mortgage Deduction for Interest Expenses – The limit on mortgage interest also remains the same with the debt bearing the interest capped at $750k ($375k if you are married filing separately).
• Medical Expense Note – The Tax Cuts & Jobs Act set the medical expense threshold at 7.5% of adjusted gross income (AGI) for years 2017 and 2018. The threshold was set to increase to 10% of (AGI) for 2019 and beyond. This Act (TCJA) extends the 7.5% of AGI, through 2020.

Retirement Account Contribution Limits

Finally, we look at the various retirement account contribution limits for 2020.

• 401(k) – Annual contribution limits increase $500 to $19,500 for 2020
• 401(k) Catch-Up – Employees age50 or older in these plans can contribute an additional $6,500 (on top of the $19,500 above for a total of $26,000) for 2020. This $500 increase in the catch-up provision is the first increase in the catch-up since 2015.
• SEP IRAs and Solo 401(k)s – Self-employed and small business owners, can save an additional $1,000 in their SEP IRA or a solo 401(k) plan, with limits increasing from $56,000 in 2019 to $57,000 in 2020.
• The SIMPLE – SIMPLE retirement accounts see a $500 increase in contribution limits, rising from $13,000 in 2019 to $13,500 in 2020.
• Individual Retirement Accounts – There are no changes here for IRA contributions in 2020, with the cap at $6,000 for 2020 and the same catch-up contribution limit of $1,000.

Conclusion

There are no dramatic changes in the rates, brackets, deductions or retirement account contribution limits that the vast majority of taxpayers tend to encounter for 2020 versus 2019. Most changes are simply adjustments for inflation. Enjoy the stability – as history has shown, it likely won’t last long.

The markets are hitting all-time highs, so if you are thinking of selling stocks now or in the near future, there is a good chance that you will have capital gains on the sale. If you’ve held the stocks for more than a year, then they will qualify for the more favorable long-term capital gains tax (instead of being taxed at ordinary income rates for short-term sales). But the total tax due can still be enough to warrant some tax planning. Luckily, the tax laws provide for several ways to defer or even completely avoid paying taxes on your securities sales.

1. Using Tax Losses

Utilizing losses is the least attractive of all the options in this article since you obviously had to lose money on one security in order to avoid paying taxes on another. The real play here is what is often referred to as tax-loss harvesting. This is where you purposely sell shares that are at a loss position in order to offset the gains on profitable sales and then redeploy this capital somewhere else. You’ll need to carefully weigh where to put the money from the sale of the shares sold at a loss as you can’t just buy the same stocks back. This is considered a “wash sale” and invalidates the strategy.

2. The 10 Percent to 15 Percent Tax Bracket

For taxpayers in either the 10 percent or 12 percent income tax brackets, their long-term capital gains rate is 0 percent. The income caps for qualifying for the 12 percent income tax rate is $39,375 for single filers and $78,750 for joint filers in 2019 ($40,000 and $80,000, respectively in 2020). Also, keep in mind that the stock sales themselves add to this limit – so calculate carefully.

Aside from selling appreciated securities yourself, another way to take advantage of the 0 percent bracket is to gift the stock to someone else instead of selling the securities and then giving the cash. Beware, however, as trying to do this with your kids can disqualify the 0 percent treatment because the kiddie tax is triggered on gifted stock sold to children younger than 19 or under 24 if a full-time student.

3. Donate

Donating appreciated securities is where we start to get into the more beneficial strategies. This technique only makes sense if you were already planning to make charitable contributions. Say for example you are planning to donate $10,000 to an organization and are in the 25 percent tax bracket. In order to write a donation check for $10,000, you would have had to earn $13,333 in income to sell the same amount of stock in order to have $10,000 left after taxes to make a cash donation in that amount.

If you donate appreciated stock instead, you only need to donate securities valued at $10,000 and you get to deduct $10,000 as a charitable deduction. That avoids the capital gains tax completely. Plus, it generates for you a bigger tax deduction for the full market value of donated shares held more than one year – and it results in a larger donation.

4. Qualified Opportunity Zones

This is the newest and most complicated (as well as controversial) way to defer or avoid capital gains taxes. Opportunity Zones were created via the Tax Cuts and Jobs Act to encourage investment in low-income and distressed communities. Qualified Opportunity Zones can defer or eliminate capital gains tax by utilizing three mechanisms through Opportunity Funds – the investment vehicle that invests in Opportunity Zones.

First, they offer a temporary deferral of taxes on previously earned capital gains if investors place existing assets into Opportunity Funds. These capital gains defer taxation until the end of 2026 or whenever the asset is disposed of – whichever is first.

Second, capital gains placed in Opportunity Funds for a minimum of five years receive a step-up in basis of 10 percent – and if held for at least seven years, 15 percent.

Third, they offer an opportunity to permanently avoid taxation on new capital gains. If the opportunity fund is held for at least 10 years, the investor will pay no tax on capital gains earned through the Opportunity Fund.

Again, the caveat here is that the details of Opportunity Zone investments can be extremely complicated, so it’s best not to attempt this one on your own. Consult with your tax advisor.

5. Die with Appreciated Stock

Unfortunately, while probably the least popular method for readers, this is certainly the most effective. When a person passes away, the cost basis of their securities receives a step-up in basis to the fair market value to the date of their death. As an example, if you purchased Amazon stock for $50 per share and when you pass away it is worth $1,700 per share, your heir’s basis in the inherited stock is $1,700. This means if they sell it at $1,700, they pay no tax at all.

Conclusion

None of the above methods are loopholes or tax dodges; they are all completely legitimate. However, your ability to take advantage of these techniques will depend on your income level, personal goals and even your age. As a result, it’s best to consult with your tax advisor to see what makes sense for your personal situation.

With the start of the fourth quarter of 2019 underway, it’s time to see what the Internal Revenue Service (IRS) will expect of filers for their 2019 taxes. The following are a list of major changes that filers need to be aware of:

1. Removal of the Affordable Care Act’s (ACA) Individual Mandate Penalty

With the passage of the Tax Cuts and Jobs Act (TCJA), filers and households who failed to carry adequate health insurance according to the ACA’s minimum coverage requirements will no longer have to pay the penalty on their 2019 taxes. This is because the TCJA lowered the penalty to zero dollars permanently. In previous years, households not meeting ACA health insurance requirements were mandated to pay either 2.5 percent of household income or $347.50 per child and $695 per adult, up to $2,085.

2. Greater Medical Expense Deduction Requirements

2019 filers are only able to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income (AGI). The threshold was lowered to 7.5 percent for the 2017 and 2018 tax years by the TCJA, but will revert to the original 10 percent threshold in 2019.  

3. Changes to Treatment of Alimony

The TCJA removed the ability for those paying alimony to their former spouse to deduct these payments for the 2019 tax year. The IRS also removed deductibility for alimony or separate maintenance payments for divorce or separation agreements signed off after Dec. 31, 2018. If a divorce or separation agreement that provides for alimony or separate maintenance payments was agreed to before Dec. 31, 2018, and is then modified after Dec. 31, 2018, such payments lose deductibility. Former spouses receiving alimony or separate maintenance payments from an agreement created or modified after Dec. 31, 2018, are not required to report such payments on their tax return.  

4. Contribution Limits Raised for Retirement Accounts

Those with 401(k), almost all 457 plans, the federal government’s Thrift Savings Plan and 403(b) account plans can contribute $19,000 in 2019, an increase of $500 from 2018’s $18,500 limit. Taxpayers 50 and older can still contribute another $6,000 for 2019, a catch-up contribution. Taxpayers with Individual Retirement Accounts (IRAs) can contribute $6,000 in 2019, $500 more than 2018’s $5,500 limit. Those 50 years or older can add another $1,000 to their IRA accounts in 2019. The increase in IRA contribution limits is the first increase since 2013.     

5. Increased HSA Contribution Limits

Health Savings Accounts’ contribution limits for 2019 have increased, according to the IRS. For an individual or a self-only High Deductible Health Plan, 2019’s contribution limit is raised to $3,500, or $50 more than 2018’s contribution limit of $3,450. For a family high deductible health plan, 2019’s contribution limit is raised to $7,000, $100 more than 2018’s contribution limit of $6,900. The catch-up contribution is an extra $1,000 for account holders age 55 or older.

6. Increasing Standard Deduction Allowances

For those choosing not to itemize their deductions in 2019, the IRS has increased standard deduction amounts for filers. For single filers and those filing as married filing separately, the standard deduction increased by $200, to $12,200. For those filing as head of household, the standard deduction increased by $350, to $18,350. For those choosing to file married filing jointly, there’s an increased allowance of $400, to $24,400.

7. 2019 Income Brackets

With the new tax year comes higher income tax brackets. Depending on how much taxpayers made in 2019, the following are the new income level brackets:

• 37 percent: Individual single taxpayers making more than $510,300 or married couples filing jointly making $612,350.
• 35 percent: Individuals making more than $204,100, or $408,200 for married couples filing jointly.
• 32 percent: Individuals making more than $160,725, or $321,450 for married couples filing jointly.
• 24 percent: Individuals making more than $84,200, or $168,400 for married couples filing jointly.
• 22 percent: Individuals making more than $39,475, or $78,950 for married couples filing jointly.
• 12 percent: Individuals making more than $9,700, or $19,400 for married couples filing jointly.
• 10 percent: Individuals making up to $9,700, or $19,400 for married couples filing jointly.