Dear Norman – Tax Inflation Adjustments for Tax Year 2019 & Bonus Depreciation

By November 20, 2018Dear Norman

Dear Norman,

Wow. So, like, did I need you since last Thursday. Where were you when I needed you most oh GREAT One?

So, like my commute was horrible going home last Thursday night. I just got home 45 minutes ago. Thank you Department of Transportation. So, I know what you are thinking. Like, “you poor thing. I feel so bad that it took you so long to get home”

But oh, wise one, the commute wasn’t the worst part. No, not at all. The screaming and crying babies didn’t bother me either. The lack of food and sleep even invigorated me. So, you ask what the worst part of my commute was. It was the misinformation my fellow commuters have about the new tax act.

Why can you believe that the train engineers don’t even understand the new tax law and how it allows small businesses to expense more, as well as expanding bonus depreciation? The ferry boat operators couldn’t fathom the new tax bracket. What I found more disturbing was that the NJ Transit bus operators did not comprehend the new standard deduction for married filing jointly. The airline captain knew little or nothing about tax year 2019 annual inflation adjustments for more than 60 tax provisions.

That was the worst part of my 5-day commute.

I am so perplexed.

You are all knowing, and I seek your comforting words.

Paul from Perth Amboy


Dear Paul

What a terrible story. I don’t know what is worse, your commute or meeting individuals who don’t know the new tax laws. But my advice is for you to take an Uber in such situations.

We must work together to fight this misinformation.

First let’s go over a few basic issues.

The Internal Revenue Service told me that for tax year 2019 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. If you have nothing else to do read Revenue Procedure 2018-57 which provides details about these annual adjustments. The tax year 2019 adjustments generally are used on tax returns filed in 2020.

    The tax items for tax year 2019–of greatest interest to you Paul– are in the following dollar amounts:

  • The standard deduction for married filing jointly rises to $24,400 for tax year 2019, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,200 for 2019, up $200, and for heads of households, the standard deduction will be $18,350 for tax year 2019, up $350.
  • The personal exemption for tax year 2019 remains at 0, as it was for 2018, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

For tax year 2019, the rates are:

IndividualMarried Filing Jointly
37%$510,300$612,350
35%$204,100$408,200
32%$160,725$321,450
24%$84,200$168,400
22%$39,475$78,950
12%$9,700$19,400
10%<$9,700<$19,400
  • For 2019, as in 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
  • The Alternative Minimum Tax exemption amount for tax year 2019 is $71,700 and begins to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption begins to phase out at $1,020,600). The 2018 exemption amount was $70,300 and began to phase out at $500,000 ($109,400 for married couples filing jointly and began to phase out at $1 million).
  • The tax year 2019 maximum Earned Income Credit amount is $6,557 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,431 for tax year 2018. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2019, the monthly limitation for the qualified transportation fringe benefit is $265, as is the monthly limitation for qualified parking, up from $260 for tax year 2018.
  • For calendar year 2019, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is 0, per the Tax Cuts and Jobs act; for 2018 the amount was $695.
  • For the taxable years beginning in 2019, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,700, up $50 from the limit for 2018.
  • For tax year 2019, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, an increase of $50 from tax year 2018; but not more than $3,500, an increase of $50 from tax year 2018. For self-only coverage, the maximum out-of-pocket expense amount is $4,650, up $100 from 2018. For tax year 2019, participants with family coverage, the floor for the annual deductible is $4,650, up from $4,550 in 2018; however, the deductible cannot be more than $7,000, up $150 from the limit for tax year 2018. For family coverage, the out-of-pocket expense limit is $8,550 for tax year 2019, an increase of $150 from tax year 2018.
  • For tax year 2019, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $116,000, up from $114,000 for tax year 2018.
  • For tax year 2019, the foreign earned income exclusion is $105,900 up from $103,900 for tax year 2018.
  • Estates of decedents who die during 2019 have a basic exclusion amount of $11,400,000, up from a total of $11,180,000 for estates of decedents who died in 2018.
  • The annual exclusion for gifts is $15,000 for calendar year 2019, as it was for calendar year 2018.
  • The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $14,080, up from $13,810 for 2018.

Now lets talk about how the new tax law allows small businesses to expense more and expands bonus depreciation.

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made tax law changes that will affect virtually every business and individual in 2018 and the years ahead. Among those for business owners are tax rate changes for pass-through entities, changes to the cash accounting method for some, limits on certain deductions and more.

Section 179 expensing changes

A taxpayer may elect to expense all or part of the cost of any Section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017. For most businesses, this means the 2018 return they file next year.

Section 179 property includes business equipment and machinery, office equipment, livestock and, if elected, qualified real property. The TCJA also modifies the definition of qualified real property to allow the taxpayer to elect to include certain improvements made to nonresidential real property. See New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act for more information.

New 100 percent, first-year ‘bonus’ depreciation

The 100 percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The law also allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.

The deduction applies to business property acquired after Sept. 27, 2017, and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. In general, the bonus depreciation percentage is reduced for property placed in service after 2022.

Taxpayers may elect out of the additional first-year depreciation for the taxable year the property is placed in service. If the election is made, it applies to all qualified property that is in the same class of property and placed in service by the taxpayer in the same taxable year. The instructions for Form 4562, Depreciation and Amortization, provide details.

Paul, I know these soothing words will ease your high anxiety level.

Remember Paul, when you meet someone who is not as informed as you are, we must educate them. Show patience, don’t yell and try to be more understanding.

Norman


    

    


    

Any accounting, business or tax advice contained in this post, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.