The IRS recently announced its 2019 cost-of-living adjustments to taxable items, several of which may impact you this tax season. Many of the amounts were increased to account for inflation, though some remained at 2018 levels. As you begin to review your 2018 tax picture with an eye towards end-of-year planning, it’s important to have a good understanding of the cost-of-living adjustments so you can incorporate the appropriate strategies into your annual planning.

2019 Cost of Living Adjustments

Under the Tax Cuts and Jobs Act, annual inflation adjustments are now calculated using the chained consumer price index (also known as C-CPI-U) and adopts the C-CPI-U on a permanent basis. This increases tax bracket thresholds, the standard deduction, certain exemptions, and other figures at a slower rate than was the case with the CPI-U previously used, potentially pushing taxpayers into higher tax brackets and making various breaks less effective, over time.

Income Taxes for Individuals Cost-of-living Adjustments

Although tax bracket thresholds are increasing for each filing status, those who find themselves in the higher tax brackets will experience a more significant increase as the brackets are based on percentages. For example, the top of the 10% bracket increases by $175 to $350, depending on filing status, but the top of the 35% bracket increases by $10,300 to $12,350.

2019 Ordinary-income Tax Brackets

Tax rate Single Head of household Married filing jointly or surviving spouse Married filing separately
10% $0 – $9,700 $0 – $13,850 $0 – $19,400 $0 – $9,700
12% $9,701 – $39,475 $13,851 – $52,850 $19,401 – $78,950 $9,701 – $39,475
22% $39,476 – $84,200 $52,851 – $84,200 $78,951 – $168,400 $39,476 – $84,200
24% $84,201 – $160,725 $84,201 – $160,700 $168,401 – $321,450 $84,201 – $160,725
32% $160,726 – $204,100 $160,701 – $204,100 $321,451 – $408,200 $160,726 – $204,100
35% $204,101 – $510,300 $204,101 – $510,300 $408,201 – $612,350 $204,101 – $306,175
37% Over $510,300 Over $510,300 Over $612,350 Over $306,175

The Tax Cuts and Jobs Act (TCJA) suspended personal exemptions through 2025 At the same time, it nearly doubled the standard deduction (which is indexed annually for inflation) through 2025. For 2019, the standard deduction is $24,400 for married couples filing jointly, $18,350 for heads of households, and $12,200 for singles and married couples filing separately. After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions, though it might not help those taxpayers who typically itemize their deductions.

The Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others, and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. The 2019 cost-of-living adjustments increase the threshold for the 28% bracket by $3,700 for all filing statuses except the married filing separately status, which increased by half that amount.

2019 AMT brackets

Tax rate Single Head of household Married filing jointly or surviving spouse Married filing separately
26% $0  –  $194,800 $0  –  $194,800 $0  –  $194,800  $0  –  $97,400
28% Over $194,800 Over $194,800 Over $194,800 Over $97,400

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2019 are $71,700 for singles and heads of households and $111,700 for joint filers (an increase of $1,400 and $2,300, respectively, over 2018 amounts). The inflation-adjusted phaseout ranges for 2019 are $510,300–$797,100 for singles and heads of households and $1,020,600–$1,467,400 for joint filers. Amounts for separate filers are half of those for joint filers.

Education and Child-related Tax Breaks

The maximum benefits of various education and child-related breaks generally remain the same for 2019, though most of these breaks are limited based on a taxpayer’s Modified Adjusted Gross Income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2019, depending on the break. For example:

  • The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2019: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.
  • The Lifetime Learning credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2019. They’re $116,000–$136,000 for joint filers and $58,000–$68,000 for other filers — up $2,000 for joint filers and $1,000 for others.
  • The adoption credit. The MAGI phaseout ranges for eligible taxpayers adopting a child also increase for 2019 by $4,020 to $211,160–$251,160 for joint, head-of-household, and single filers. The maximum credit increases by $240 to $14,080 for 2019.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child, him or herself, might be eligible.

Gift and Estate Taxes

The unified gift and estate tax exemption and the Generation-Skipping Transfer (GST) tax exemption are both adjusted annually for inflation. As a result of the cost-of-living adjustments, the amount is $11.40 million (up from $11.18 million for 2018).

The annual gift tax exclusion remains at $15,000 for 2019. It’s adjusted only in $1,000 increments, so it typically increases only every few years. It increased to $15,000 in 2018.

Retirement Plans

Not all of the retirement plan-related limits increase from the cost-of-living adjustments. You may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Retirement Plan-related Limits

Type of limitation 2018 limit 2019 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $18,500 $19,000
Annual benefit for defined benefit plans $220,000 $225,000
Contributions to defined contribution plans $55,000 $56,000
Contributions to SIMPLEs $12,500 $13,000
Contributions to IRAs $5,500 $6,000
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $6,000 $6,000
Catch-up contributions to SIMPLEs $3,000 $3,000
Catch-up contributions to IRAs $1,000 $1,000
Compensation for benefit purposes for qualified plans and SEPs $275,000 $280,000
Minimum compensation for SEP coverage $600 $600
Highly compensated employee threshold $120,000 $125,000

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, these IRA-related MAGI phaseout range limits will all increase for 2019:

  • Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan.
    • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan.
      • For a spouse who participates, the 2019 phaseout range limits increase by $2,000, to $103,000–$123,000.
      • For a spouse who doesn’t participate, the 2019 phaseout range limits increase by $4,000, to $193,000–$203,000.
      • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2019 phaseout range limits increase by $1,000, to $64,000–$74,000.
    • Taxpayers with MAGIs within the applicable range can deduct a partial contribution while those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
    • A taxpayer whose deduction is reduced or eliminated can make non-deductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up, if applicable, and reduced by any Roth IRA contributions) still applies. Non-deductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.
  • Roth IRAs. Whether or not you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute.
    • For married taxpayers filing jointly, the 2019 phaseout range limits increase by $4,000, to $193,000–$203,000.
    • For single and head-of-household taxpayers, the 2019 phaseout range limits increase by $2,000, to $122,000–$137,000.
    • You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Cost-of-Living Adjustments and Tax Planning

With the cost-of-living adjustments trending higher, you have an opportunity to realize some tax relief next year. In addition, with many retirement plan-related limits also increasing, you have the chance to boost your retirement savings. If you have questions on the best tax-saving strategies to implement based on the 2019 numbers, please contact your Untracht Early advisor.