Feb 01, 2019
By Robin Jackson Miller, EA Partner at Terry Lockridge & Dunn
Although it has been a year since we have seen major tax legislation, there are a few big changes you may want to consider as you plan for the year ahead:
Alimony rules change dramatically. For all divorce agreements that finalize after December 31, 2018, alimony payments will not bear any tax consequences. The person receiving the alimony will no longer owe taxes on the income and the person paying the alimony cannot deduct the expense. This change does not affect agreements with alimony considerations in place before January 1, 2019 — alimony in those cases will still be taxable and deductible.
There are a couple things to consider with this change. First, if a prenuptial agreement is in place, it might need to be revisited. The cutoff date applies to when a divorce is finalized, regardless of any prior agreements. Second, the tax implications of payment arrangements (mortgage payments, health insurance, etc.) as part of a divorce settlement in lieu of alimony payments need to be fully understood and applied to your tax situation.
No more individual mandate health insurance penalty. The penalty imposed on individuals without qualified health insurance will be gone starting in 2019. The penalty has been as high as $2,085 in previous years, depending on the makeup of your household. Be aware that the penalty is still in place for 2018.
Caution should to be taken here as individual states may impose their own individual mandate penalties. For example, Massachusetts currently has a penalty in place, New Jersey and Washington D.C. have penalties starting in 2019, and Vermont will follow in 2020. More states are expected to entertain the idea in the future. Furthermore, the Congressional Budget Office (CBO) is projecting a 10 percent increase in health insurance premiums because of this change. Prepare yourself for possible rising insurance costs.
Medical deduction income threshold increases. Deducting your medical expenses is now more difficult. The adjusted gross income (AGI) floor to deduct medical expenses as an itemized deduction is increasing by 2.5 percent, from 7.5 percent to 10 percent of AGI in 2019. This means that depending on your situation, it will either be harder to deduct medical expenses or the deduction you have been accustomed to will be less.
Consider this example: George's AGI is typically $100,000 per year, and he averages $12,000 in annual medical expenses. In 2018, George can deduct all qualified medical expenses over $7,500 (7.5 percent of his AGI). After subtracting the threshold from George's medical expenses, he is left with a $4,500 deduction for 2018. In 2019, the threshold rises to 10 percent. George's 2019 deduction is only $2,000 — a decrease of $2,500 from 2018.
One way to hedge against the effect of the change is to place multiple years of expenses into one taxable year, if possible. While most health-related costs are uncontrollable, if you have control over the timing of a procedure, lumping high expenses into a single year may allow you to itemize one year and take advantage of the higher standard deduction the next.
Understanding these 2019 changes now allows you to kick off the new year with your tax planning strategy in full swing. Contact Robin at email@example.com, or any of the accountants at Terry Lockridge & Dunn to discuss how the changes impact your situation. They can be reached at 319-364-2945 in Cedar Rapids, or at 319-339-4884 in Iowa City.