28 THE QUEENS COURIER • AUGUST 15, 2019 FOR BREAKING NEWS VISIT WWW.QNS.COM
TAX TIPS
INDEXING
BY JOHN SAVIGNANO, CPA
Why Tax Brackets and Other Tax Numbers Are Changing
It all has to do with a provision in the tax code known as indexing. Each year, the IRS
adjusts tax brackets to account for inflation. For example, if the inflation rate for the past
year is 2%, the IRS will adjust all income brackets up by roughly 2%.
For example, if a particular tax bracket begins at a taxable income of $40,000 one year, that
number will be increased to $40,800 for the following year. The IRS also likes round
numbers. Percentages will be no better than approximate, since numbers will be rounded up
in increments of $25, $50, or even $100.
The purpose of indexing is to eliminate what's known as bracket creep. That’s where you
get pushed into a higher tax bracket due to pay raises that do little more than match the rate
of inflation. Indexing allows you to stay in the same tax bracket, despite a slightly higher
income level.
Until 2017, indexing was based on changes in the Consumer Price Index (CPI). But
beginning in the 2019 tax year, indexing will be based on the Chained Consumer Price
Index. The change is part of the Tax Cuts and Jobs Act of 2017.
Indexing applies not only to tax brackets, but also to other relevant tax numbers, like the
standard deduction and the alternative minimum tax (AMT).
The New 2019 Federal Income Tax Brackets and Rates for Capital Gains
Capital gains are taxed at different rates from ordinary income. For example, while there
are seven tax brackets for ordinary income, ranging from 10% to 37%, there are just three for
capital gains, ranging from 0% to 20%.
This is a major advantage for anyone who has substantial capital gains income. The capital
gains tax rate is substantially lower than the tax rate on a comparable amount of ordinary
income.
Just as is the case with the income brackets for ordinary income, the income brackets for
capital gains have also been increased slightly from 2018.
The Standard Deduction for 2019
As you probably know – or you'll find out when you file your 2018 tax return – personal
exemptions have been eliminated under the new tax law. The $4,050 you could claim up
until 2017 for yourself, your spouse and any eligible dependents is now history.
In its place, the standard deduction has been roughly doubled. That will work out well for
singles and couples, but it will be a definite negative for anyone with dependents.
And like other numbers in the tax code, the standard deduction will be increasing slightly
for 2019.
Other Tax Numbers Changing in 2019
Qualified Business Income Deduction. Beginning in the 2018 tax year, the new tax law
provides small business owners with a 20% deduction against business income. It’s officially
referred to as Section 199A deduction and it applies to small businesses, other than “C”
corporations. There are income limits against which that deduction can be taken.
Alternative Minimum Tax (AMT). The AMT was created in the 1960s to impose taxes on
taxpayers who claim an excessive amount of tax breaks. It provides a second set of tax rates
that will be imposed if they exceed taxes as their taxable income is normally calculated.
The tax code provides an income exemption to the AMT, below which the tax will not
apply. There is also in an income phase-out beyond which the exemption no longer applies.
Both are indexed for inflation.
Retirement Contributions.
Base retirement contributions are increasing by $500 in 2019. However, catch-up
contributions for taxpayers 50 and older have not been increased.
For 2019, retirement plan contributions will look like this:
or older.
2018), plus a $6,000 catch-up contribution if you’re 50 or older.
The lifetime gift and estate tax exemption. This is scheduled to increase from $11.18
million in 2018 to $11.4 million in 2019. The annual gift exclusion will be $15,000,
unchanged from 2018.
Other Major Changes Taking Place in 2019
The elimination of the Affordable Care Act (ACA) penalty. One of the more controversial
provisions of the ACA was the imposition of a penalty on consumers with no health
insurance coverage. The new tax law is finally ending that penalty. However, in one of the
lesser known provisions of the new tax law, the penalty will continue to be in force for 2018.
The final termination of the penalty doesn't take place until the 2019 tax year.
John Savignano is a partner with Savignano Accountants & Advisors located at 47-46
Vernon Blvd., Second Floor, in Long Island City. If you have any questions or require
additional information, please call John at 718-707-0955.
Call Now & End Your Tax Nightmare!
Co-Author of the
best selling book
“Breaking the Tax Code”
Salvatore P. Candela, EA, ATA, ABA
Enrolled Agent - Tax Advisor
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