The Tax Cuts and Jobs Act, passed in 2017, represents a substantial reform of existing tax legislation. Under the new tax law for 2019, a number of slated changes will impact everything from what your tax rate is to what kinds of tax deductions you can claim, and may even impact your divorce. Many individuals that will be impacted by these 2019 tax changes still have only a vague understanding of what exactly changed. In this article, we’ll outline some of the largest changes that came about with the passing of the Tax Cuts and Jobs Act, and discuss some of the ways these changes might impact your life. Some of these changes may not affect you at all, while others may have a direct impact on your tax burden.
Of the most talked about 2019 tax changes, the increase in the standard deduction is one that will impact many joint filers. The Tax Cuts and Jobs Act introduced sweeping changes to the standard deduction. The true impact of these changes remains to be seen, but taken together they are expected to reduce the number of people filing itemized returns.
For the 2018 tax year, the standard deduction for individuals filing as single or married filing separately will be $12,000. Filing as married filing jointly comes with a standard deduction of $24,000, while heads of household have a standard deduction of $18,000. Compared to the previous tax law, the Tax Cuts and Jobs Act nearly doubled the standard deduction for all filers. This, alongside changes to itemized deductions themselves, may negate the benefits of itemizing tax deductions for some individuals. At the same time, for individuals who lack deductions to itemize, the standard deduction may help reduce tax liability.
The Tax Cuts and Jobs Act also substantially changed some other deductions. The new tax laws set to take effect in 2019 introduced a $10,000 cap for state and local income taxes (SALT), which also include things like real estate and tangible personal property taxes. The cap for charitable deductions was raised to 60% of an individual’s adjusted gross income (AGI), up from 50% under the previous tax law. The threshold for medical expense deductions was changed as well. Under the new law, medical expenses exceeding 7.5% of the filer’s AGI are deductible, down from the 10% threshold under the previous law. This change may prove beneficial for individuals with high medical expenses, such as retirees.
The Tax Cuts and Jobs Act brought some fairly significant changes to income tax brackets. These changes affect people of all income brackets in one way or another. Let’s take a look at how the income brackets shifted for high income earners, middle income earners, and low income earners. We’ll take a look specifically at joint filers, but these changes are representative of single filers as well. Single filer tax rates for 2018 can be found here.
High Income Households
The changes to the highest tax brackets garnered the most attention in the media, and for good reason. Not only was the effective tax rate reduced, but the bracket thresholds were changed as well. Under the previous tax law the highest income households, or those who earned $470,701 or more, were taxed at a rate of 39.6%. The threshold for the highest income bracket has shifted. Under the new tax law for 2019, households earning $600,000 or more fall into the highest income bracket and are taxed at a rate of 37%.
The next two tax brackets for high income households experienced some shifts as well. Under the previous law, households earning between $416,701 – $470,700 were taxed at a rate of 35%. These households will still be taxed at the same rate of 35%, but this range has been expanded to encompass households with an annual income of $400,001 – $600,000. The next bracket down had a rate of 33% under the previous law, and covered households that earned between $233,351 – $416,700. In contrast, under the new law households that earn between $315,001 – $400,000 will now be taxed at a rate of 32%.
Middle Income Households
Although what constitutes a middle income household can certainly be argued, looking at the changes to the next two tax brackets down from the highest income households serves as a useful way to differentiate these groups. Under the old law, households earning between $153,101 – $233,350 were taxed at a rate of 28%. Under the Tax Cuts and Jobs Act, this tax rate has been reduced to 24% and applies to households earning between $165,001 – $315,000.
The next bracket down had a tax rate of 24% under the previous tax law, and applied to households earning between $75,000 – $153,100. Under the new tax law for 2019, the tax rate for this bracket has been reduced to 22%, while the range has been shifted to households earning between $77,401 – $165,000.
Low Income Households
The two lowest tax brackets experienced some shifts as well that may be largely beneficial for households at these after-tax income levels. Under the old law, households earning between $18,651 – $75,900 were taxed at a rate of 15%. In contrast, under the new law this tax rate has been reduced to 12% and applies to households earning between $19,054 – $77,400.
The lowest income tax rate remained the same at 10%. However, under the old law this rate applied to households earning up to $18,650 annually. Under the new tax law, the 10% rate applies to households that earn up to $19,050 annually.
The new tax law for 2019 brought some substantial changes to the way that spousal support is treated for federal tax purposes. These changes ultimately shifted the tax burden between parties involved in spousal support payments. If you already have an existing divorce or separation agreement with terms related to spousal support, you will remain under the current tax structure with which you are likely familiar. The changes in how spousal support is taxed in the Tax Cuts and Jobs Act only apply to divorce or separation agreements finalized after December 31, 2018. Let’s dive into some of these changes to see how they might affect parties who pay or receive spousal support.
Current Spousal Support Tax Rules
Although the Tax Cuts and Jobs Act changed the way that spousal support is treated for tax purposes, the old laws are still in effect through the end of the year, so we’ll refer to them as the “current” rules. Under these laws, individuals who pay spousal support are able to deduct the annual payments from their taxable income. This deduction is especially beneficial because it is an “above-the-line” deduction, meaning it is done before an individual’s AGI was calculated. This effectively reduces the tax burden of the individual making spousal support payments. Under the current law, recipients of spousal support payments are required to report any support received as income, and are therefore required to pay taxes on that money.
Spousal Support Tax Rules For 2019
The 2019 tax law completely changed the way that spousal support is taxed. Under the new law, the individual making spousal support payments will no longer be allowed to deduct those payments from his or her taxes. Whereas before, individuals could use spousal support to reduce taxable income, under the new law individuals will be required to pay taxes on these payments. On the other side of this equation, recipients will no longer be required to pay taxes on spousal support received. Support recipients will no longer need to include spousal support payments in their income for taxes, which may reduce federal tax responsibilities for individuals on the cusp of a tax bracket threshold.
If you aren’t sure whether payments you are making to an ex-spouse qualify as spousal support, be sure to carefully check the IRS requirements.
The Tax Cuts and Jobs Act brought about a number of significant changes to existing tax law. Some of these changes may be beneficial, but the true effects of the changes will remain to be seen. When assessing how the 2019 tax changes will affect you, it is important to keep in mind your unique situation. For example, individuals that are in the process of obtaining a divorce or separation finalized may wish determine which tax laws will provide the most benefit. Be sure to consult an expert Family Law attorney at Bremer Whyte Brown & O’Meara, LLP.