This 2020 tax season, there are plenty of changes that could affect 2019 taxes. Here are some highlights to be aware of before the new, July 15 filing deadline
Income tax rates and tax brackets
For the 2019 tax year, rates are the same, but there are small changes to brackets to adjust for inflation. Your tax rate — defined as the percentages of your income you pay in taxes — is based on your tax bracket, which is the income range you’re in. Check out the following chart for all of the current tax brackets and their corresponding tax rates:
2019 Marginal Income Tax Rates and Brackets
|2019 Marginal Tax Rates||Single Tax Bracket||Married Filing Jointly Tax Bracket||Head of Household Tax Bracket||Married Filing Separately Tax Bracket|
|10%||$0 – $9,700||$0 – $19,400||$0 – $13,850||$0 – $9,700|
|12%||$9,701 – $39,475||$19,401 – $78,950||$13,851 – $52,850||$9,701 – $39,475|
|22%||$39,476 – $84,200||$78,951 – $168,400||$52,851 – $84,200||$39,476 – $84,200|
|24%||$84,201 – $160,725||$168,401 – $321,450||$84,201 – $160,700||$84,201 – $160,725|
|32%||$160,726 – $204,100||$321,451 – $408,200||$160,701 – $204,100||$160,726 – $204,100|
|35%||$204,101 – $510,300||$408,201 – $612,350||$204,101 – $510,300||$204,101 – $306,175|
|37%||Over $510,300||Over $612,350||Over $510,300||Over $306,175|
If your income or marital status hasn’t changed since the 2018 tax season, you aren’t likely to notice much of a difference on your tax bill.
As a refresher, the tax code is designed to let taxpayers put aside some of their income to cover living expenses. Taxpayers have two options to deduct those expenses from their taxable income: they either can take a standard deduction, or they can itemize deductions.
The Tax Cuts and Jobs Act of 2017 (TCJA) almost doubled the standard deduction. The standard deduction is indexed for inflation every year. In 2019, for single filers, it increased to $12,200, and for married couples filing jointly, it increased to $24,400. Whether to take a standard deduction or itemize is a good topic to raise with your CPA.
|Married Filing Jointly||$24,000||$24,400|
|Married Filing Separately||$12,000||$12,200|
|Head of Household||$18,000||$18,350|
Health insurance coverage
The federal penalty for not being enrolled in health insurance was eliminated in 2019. The prior penalty in 2018 was $695 for an adult and $347.50 for a child, or 2% of your yearly income, whichever amount was more.
Medical expenses deduction
For those who itemize deductions, the qualified, unreimbursed medical expenses that are more than 7.5% of Adjusted Gross Income (AGI) will be deductible. Legislation at the end of last year extended the temporary threshold reduction from 10% for the years 2017/2018 to 2019/2020.
Estate tax exemption
The TCJA dramatically (but temporarily) increased the lifetime exemption for estate, gift and generation-skipping taxes through 2025. The amount that could be transferred estate tax-free essentially doubled and will be indexed for inflation every year. For the 2019 tax year, the adjusted limit is $11.4 million for an individual or $22.8 million for a couple. The amount for an individual is set to increase to $11.58 million in 2020. Estate tax rates are graduated with the highest tax being 40%.
Net Investment Income Tax
As part of the Patient Protection and Affordable Care Act of 2013, a new, 3.8% surtax was imposed on any net investment income (often referred to as Net Investment Income Tax, or NIIT) above the Adjusted Gross Income threshold amounts of $200,000 for a single filer, $250,000 for joint filers and $125,000 for married taxpayers who file separately. The TCJA did not repeal this tax. The NIIT applies to interests, dividends and capital gains. It also applies to passive business income, rental income from real estate, royalty income from energy assets or intellectual property rights. Something important to note: a growing number of taxpayers could be subjected to paying the NIIT because the income thresholds are not adjusted for inflation. To the extent that inflation increases wages and incomes, more people could find their income exceeding the thresholds. The IRS provides an overview about the NIIT here.
Capital Gains Tax
Capital gains fall into two groups — either short-term capital gains or long-term capital gains — according to how long you’ve held an asset. Among the key differences between short and long term gains tax:
- Short-term capital gains tax applies to profits from selling an asset held for less than a year. These taxes are tied to where your income falls in the federal tax brackets and are paid at the same rates as ordinary income taxes.
- Long-term capital gains tax applies to assets held more than a year. These tax rates are 0%, 15% and 20%, depending on your income tax bracket.
Special rules apply to gains on certain types of assets, such as some derivatives, collectibles and real estate. Consult your tax advisor with respect to the tax consequences of those investments.
The capital gains tax rates remained the same as under the 2018 tax law. However, the income required for each bracket goes up every year to account for workers’ increasing incomes. Here, according to the IRS, are the details on capital gains rates for the 2019 and 2020 tax years:
Long-term capital gains tax rates for the 2019 tax year
|Filing Status||0% Rate||15% Rate||20% Rate|
|Single||Up to $39,375||$39,376 – $434,550||Over $434,550|
|Married filing jointly||Up to $78,750||$78,751 – $488,850||Over $488,850|
|Married filing separately||Up to $39,375||$39,376 – $244,425||Over $244,425|
|Head of household||Up to $52,750||$52,751 – $461,700||Over $461,700|
Long-term capital gains tax rates for the 2020 tax year
|Filing Status||0% Rate||15% Rate||20% Rate|
|Single||Up to $40,000||$40,001 – $441,450||Over $441,450|
|Married filing jointly||Up to $80,000||$80,001 – $496,600||Over $496,600|
|Married filing separately||Up to $40,000||$40,001 – $248,300||Over $248,300|
|Head of household||Up to $53,600||$53,601 – $469,050||Over $469,050|
For example, in 2020, a single person won’t pay any capital gains tax if their total taxable income (which includes capital gains) is $40,000 or below. However, they’ll pay 15 percent on capital gains if their income is $40,001 to $441,450. Above that income level, the rate jumps to 20 percent.
It’s also important to note that those capital gains may be subjected to the Net Investment Income Tax (NIIT), an additional surcharge of 3.8 percent, if the taxpayer’s income is above certain amounts.
As a reminder, “qualifying dividends” are taxed in the same manner as long-term capital gains while “ordinary dividends” are taxed as ordinary income. Overall, most regular dividends paid by United States companies will be treated as qualifying. Dividends from certain foreign companies also may qualify while certain categories of dividends, such as those paid by REITS and MLPS, will not. In addition, dividends that otherwise would qualify may be treated as ordinary if the stock is hedged or if certain holding periods are not met. Investors should consult their tax advisors for specific guidance.
July 15: This special, extended deadline is the day to file your 2019 income tax return — and also the last day to request an extension if you need more time to file. It’s important to note that an extension to file is not extension to pay Uncle Sam. By paying on time, you can avoid being charged a late penalty and interest on unpaid taxes.
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General Disclosures: Please consult your Tax Advisor for a complete discussion of your situation and specific tax consequences. The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer decisions. All expressions are as of its publishing date and are subject to change. There is no assurance that any of the trends mentioned will continue in the future. Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of trading advice or guarantee of future results. Certain information contained herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Any reproduction or distribution of this presentation, as a whole or in part, or the disclosure of the contents thereof, without the prior consent of Cardan Capital Partners, LLC, is prohibited.