Every year, rules, taxes, and other things regarding your financial life change. Sometimes a lot — the Tax Cuts and Jobs Act rewrote large swaths of the tax code — and sometimes a little less. This year isn’t a major year, but for many segments of the population, there are a few changes that are important to note. Here’s a brief cheat sheet.
A new tax situation
This spring, Americans will have the first real view of the new tax bill, up close and personal, when they file their 2018 taxes.
“After filing taxes people will know how the tax bill affected their personal situation,” says T. Rowe Price's Stuart Ritter, CFP. “That gives people an opportunity to adjust withholding going forward, to pay less in taxes, and to decide what they might do with money they save.”
On average, according to Morgan Stanley analysis, tax refunds will be 26% bigger than last year.
Ritter also recommends using the new year as an opportunity to check in and evaluate your finances, habits, and progress to goals — something that’s a good idea to do every year.
A new tax form?
Earlier this year, we saw a draft for a new Form 1040. Since then, we haven’t heard too much, but an updated, slimmed down version is expected. Of course, most people will never see them, as they file electronically.
An alimony change
Up until now, a divorced spouse who paid alimony to an ex-spouse could deduct the alimony payments he or she paid, and the spouse who received the alimony paid taxes on it. For divorces settled after 2019, however, alimony payments will not be tax-deductible, and the divorced spouse getting alimony will not have to pay taxes on it. This means the government will end up taking a larger portion from the 600,000 taxpayers who receive this benefit, which is estimated to be $7 billion.
Retirement plan changes
For anyone using a 401(k), 403(b), or 457 plan, or the government’s Thrift Savings Plan, the IRS contribution limits are going up by $500 to $19,000. The contribution limit for an IRA is also going up by $500 to $6,000.
Income thresholds for the beginning of phase-outs for eligibility in various plans also will get increased. For example, you will be able to fully contribute to a Roth IRA if you earn up to $122,000 a year, an increase of $2,000.
Catch-up contributions for 401(k)’s stay at $6,000 for people age 50 and over.
Medical deductions will be harder to get
In 2018, medical expenses could be deducted after passing 7.5% of adjusted gross income, or AGI. (This is gross income minus specific deductions.) But in 2019, that figure jumps to 10%, meaning it will be harder to claim. Intuit, for its part, says that this isn’t necessarily unattainable. This deduction could be taken from being out of a job and having a low AGI, a serious medical situation, or “just needing braces for a couple of teenagers.”
Social Security beneficiaries see the biggest cost of living adjustment or COLA this year, a raise of 2.8%. This affects 62 million people on the program and and 8 million who receive Supplemental Security Income. This is the biggest COLA since 2012, when it went up 3.6%. (The biggest in recent memory are 4.1% in 2006 and 5.4% in 1991, though they don’t touch the 14.3% of 1980.)
There are a few other important changes to note. The ceiling for the Social Security tax increases to $132,900 from $128,400. And the earning limit for workers younger than “full” retirement age, which is 66 for those born between 1943 and 1954, goes to $17,640. If you go higher than that, your Social Security benefits go down $1 for each $2 you make over that figure.
If you’re turning 66 this year, that ceiling shoots up to $46,920 until your birthday, when you no longer have a limit anymore. If you overshoot that limit in the months before, you only get docked $1 in benefits for every $3 you go over. So it is still financially advantageous to earn, even if you’re getting benefits.
Medicare has a few changes this year that are important to note. In 2019, there are more Medicare Advantage plans. Average premiums for part D are down $1 per month according to the Centers for Medicare and Medicaid Services. And most critically, the infamous “doughnut hole” will finally go away.
That means that after you’ve paid $3,820 for drugs, you only have to pay 25% of the price tags for brand-name medications and 37% for generics. If you hit $5,100, you only have to pay 5% of drug costs after that. This is something that has plagued people on Medicare for ages, as people who spent over $3,750, in 2018 for example, had to pay 35% of the cost of brand-name drugs until $5,000.
For tax components that change with inflation, like the standard deduction, 2019 will be the first year where these figures are adjusted using the chained consumer price index instead of the normal CPI. If you want to go into the weeds, the chained CPI adjusts for when people buy something else if certain items get more expensive. This means that it grows slower than the CPI index.
For you, it means that anything tied to inflation will grow at a slower rate than before, notes Untracht’s Barry Kleiman, CPA.
Clarification 12/19: The alimony change applies to divorces settled in 2019 onwards, not for all divorces.