As 2018 comes to a close only to be written into the history books, we are eager to see what 2019 has to offer. It’s a chance to reset financial goals, make a list of achievements to accomplish and live a better and healthier life.
While your crystal ball may be broken, there are several clues to what lies ahead for 2019. This new year is expected to be a busy year for politicians as the Senate has 33 seats up for grabs in 2020, as well as, the Presidential election cycle. However, with a new beginning comes a unique opportunity to make right of the wrongs, to realign our focus from previous feats, and to take on new challenges.
In this blog, you explore several changes and actions to take in 2019 to help you manage your household budget more efficiently, as well as, saving some money throughout the year.
I must mention that many of the tax changes below are temporary but currently set to expire in 2025.
With the enactment of the Tax Cuts and Jobs Act in December 2017, the “brackets for individuals are cut…[Internal Revenue Code Section 1], you most likely saw an increase in your paycheck.
IRS Withholding Calculator
Changes That May Benefit You:
1. Child Tax Credit (CTC) Increase to $2,000 per qualifying child (IRC Section 24)
Signed into law at the end of 2017, the tax change has increased the annual amount again. I state this because when introduced in 1997, it was a “nonrefundable credit of $400 for each qualifying child under 17” (then increased to $1,400, then limited to earned income, then decreased to $1,000) but now it allows up to $2,000 per qualifying child for the 2018 tax season as long as the child is under 17 years of age by the end of the year with $1,400 of it being refundable.
For example, once you file your taxes and you owe the IRS $4,000, you then claim your child under the Child Tax Credit which potentially drops your tax bill to $2,000.
Formula: $4,000 Tax Bill before CTC - $2,000 CTC = $2,000 New Balance due to IRA
It is important to note that it is a “Credit,” not a deduction. Many may confuse this term as a deduction “reduces the amount of your income that subject to tax” and “a credit reduces your tax bill dollar-for-dollar.”
Now that the CTC is refundable, limited up to $1,400, this may potentially help you to receive a refund.
Formula: $1,000 Tax Bill before CTC - $2,000 CTC = $1,000 refundable
If $1,500 Tax Bill before CTC - $2,000 CTC = $400 refundable (not $500)
2. Repealed Affordable Care Act individual mandate (IRC Section 5000A)
The information in this section will apply to Individuals and Families only. If you are considered an “Employer,” then read Affordable Care Act (ACA) Tax Provisions
While the tax change didn’t repeal the Affordable Care Act, it manages to do away with penalties for people who didn’t purchase health insurance. This change doesn’t go into effect until 2019!
3. Tax-free distributions up to $10,000 for tuition at elementary/secondary schools (IRC Section 529)
This change was a significant one. In our blog “How does a 529 College Savings Plan Work“ we delivered a deep in-depth review of 529 College Savings Plan. Be sure to read that article.
It is a significant change because of its expansion to no longer limiting tax breaks for education expenses for college students but opens the tax advantages for elementary and secondary schools too up to $14,000.
4. Estate and Gift Taxes Retained
These are retained but according to Motley Fool, “the 40% estate tax rate applied only to the portion of an estate that was valued at $5.59 million or more per individual, or $11.18 million per married couple”.
This means that if in 2018, you left $5.59 million to an heir, you would pay no federal estate or gift tax. If you’re married, then the amount increases to $11.18 million. Be sure to review the inflation-adjusted figures.
5. Sole Proprietors, Partnerships, Trusts, & S-Corps, may be able to deduct 20% on qualified business income (Section 199A)
Because of the vast rules and different situations that may arise, I recommend you read and research which portion applies to your particular case.
With the 20% deduction available to entrepreneurs, you could potentially get a break if your income is $157,500 if single, $315,000 if married. “Under the ‘old’ tax code, income from these small businesses would “pass-through” to the owner on her own taxes and were subject to individual income tax rates as high as 39.6 percent.”
According to the IRS.gov, “Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate.”
6. Increased Interest Rates after Fed Hike
While the Federal Reserve increasing rates slows the supply of money, an increased interest rate from the Federal Reserve has some benefits.
The first benefit is banks are more likely to lend from its reserves than when compared to lower rates. With higher prices, banks can earn more money from borrowing.
A second benefit is investors will most likely see increased rates for Certificates of Deposits (CDs), Savings, and within the bond market.
Third, is taming inflation. “The central bank’s target for inflation is 2 percent, but inflation has yet to hit the bulls-eye on a sustained basis, as measured by personal consumption expenditures, or PCE.”
Recommended Actions to Take for 2019:
1. Review your withholding allowance and make changes as necessary
2. Maximize your Roth or Traditional Individual Retirement Account
3. Make regular tax payments if you’re a business, refer to Publication 505, Tax Withholding and Estimated Tax
4. Assess & Review Your Estate planning
5. Assign Social Security Number prior to tax return due date to your child to take advantage of the Child Tax Credit
6. Report Health Care Coverage by reporting coverage, “qualify for an exemption, or report an individual shared responsibility payment for the tax year 2018”
Learn more about IRAs and if Roth or Traditional is best for you.