Just how eager you are to file your 2019 tax return, which the IRS begins accepting on Jan. 27 — depends on a lot of things.
Did you get socked with a bigger tax bill than usual last year after the sweeping changes under the Tax Cuts and Jobs Act? Did you suddenly owe money when you always got a refund?
Or do you feel more confident after you got last year’s taxes done under the new rules?
Either way, you might as well get an early start long before that April 15 tax deadline.
Many people, of course, file early in the season because they’re banking on a four-figure tax refund — including payouts from the Earned Income Tax Credit — to cover the bills.
The average federal income tax refund was $2,869 in 2019 based on returns filed through Dec. 27, 2019. That’s down slightly from an average of $2,910 in 2018.
Roughly 72% of the nearly 156 million tax returns filed through late December generated a tax refund, according to the latest IRS filing season statistics.
Here’s what you need to consider whether you’re filing your tax return in late January — or mid April:
Do you itemize or take the standard deduction?
Many people imagine that they’ve got a long list of expenses that they can take as itemized deductions on 2019 tax returns.
And you might be dragging your feet as you try digging up receipts. Plenty of people can forget about setting them aside during the year.
The reality is that the standard deduction — which went up as part of Trump’s tax reform that was enacted in December 2017 — is fairly tough to beat, and the odds have gone up that many tax filers simply will take the standard deduction.
Roughly 10% of tax filers likely ended up claiming itemizing deductions — such as interest paid on their mortgages — on their 2018 tax returns. That’s down from roughly 30% in previous years, thanks to the significant changes in tax rules that initially went into effect on the 2018 tax returns we filed last year. Based on the latest IRS data, 14.6 million taxpayers itemized in 2019 compared with 42.1 million itemized returns in 2018.
The percentage is expected to be similar for 2019 returns.
What is your standard deduction? You’re not going to itemize unless the value of all your deductions exceeds the standard deduction — now $12,200 for single filers, up from $12,000 for 2018.
A married couple filing jointly, for example, would have a standard deduction of $24,400 on a 2019 return — an extra $400 from the 2018 return.
For heads of households, the standard deduction is $18,350 for a 2019 return — up by $350 from the 2018 return.
There is also an additional standard deduction for taxpayers who were born before Jan. 2, 1955 — or age 65 and older — or blind.
If you are 65 or older, the added deduction is $1,650 for someone who is single or head of household; and $1,300 for a married taxpayer. If both spouses are 65 or older, for example, you may increase your standard deduction by $2,600.
If legally blind, the added deductions again range from $1,300 to $2,600 and would be in addition to any extra amount if you also happened to be age 65 or older.
What might you itemize? Homeowners may still want to itemize mortgage interest, property taxes and interest on a home equity loan if the loan proceeds were used to acquire or improve the property.
One major challenge: If you itemize, you now can only deduct up to $10,000 (up to $5,000 if married filing separately) for state and local real estate taxes, personal property taxes and income taxes.
The $10,000 cap — which is not indexed for inflation — will influence how many taxpayers may itemize in the future, depending on their other deductions.
Can you still deduct mortgage interest? Yes — if you don’t take the standard deduction. When it comes to mortgage interest, a married couple filing a joint return can deduct mortgage interest on the first $1 million of debt — if the mortgage was closed before Dec. 16, 2017.
If the mortgage was closed after that date, a married couple filing a joint return could deduct interest on the first $750,000 of mortgage debt. The amounts are the same for singles but halved for married couples filing separate returns.
Did states overcome that SALT cap?
Short answer: No.
Sure, some states — including New Jersey and Connecticut — have tried to engineer workarounds to ease the pain for taxpayers who face higher federal tax bills because of the new $10,000 federal limit on individual taxpayer deductions for state and local taxes, known as the SALT cap.
But taxpayers aren’t in the clear, as much legal haggling has surrounded such efforts. The IRS put a stop to one workaround, which was attempted in New York and elsewhere, that would have reclassified tax payments as charitable contributions since charitable donations remain fully tax deductible.
Lately, states have been focusing on a potential strategy for re-engineering their small business taxes to workaround some issues brought up by the $10,000 SALT limit.
“States do have discretion on how they set up their own tax system,” said Frank Sammartino, a senior fellow at the Urban-Brookings Tax Policy Center.
The U.S. House also voted for a two-year elimination of the SALT cap late in 2019 but the odds remain against the effort getting any traction in the GOP-controlled Senate.
While taxpayers remain angry in many states, it’s unlikely a quick resolution will be reached.
And individuals have to realize that “you can’t really work around it” on the 2019 tax returns, Sammartino said.
The $10,000 limit applies to both married and single homeowners. So there is a “marriage penalty” because typically a limit would be twice as high for a married couple, Sammartino said.
The $10,000 limit, as with most individual income tax provisions in the Trump tax overall, will expire after 2025. It is unclear if the measure would be extended or new rules would be enacted by Congress.
While deducting state and local income taxes is a tax break that certainly can help the wealthy, some policy experts maintain that state and local taxes help communities spend more on services to help low- and middle-income households.
These tax breaks are gone, and other changes
Several changes took place beginning on the 2018 tax returns. But the new rules remain in place on 2019 returns, too.
Job search expenses: You can no longer deduct expenses related to finding a new job.
Tax preparation fees: You can’t write off any costs from getting help with your taxes from 2018 through 2025 under the new tax law changes. There’s one exclusion: Self-employed workers can still deduct these services as a business expense.
Moving expense deductions: Gone in 2018 and 2019. But there remains an exception for active-duty military for a move relating to military orders to a permanent location. In that case, the military can deduct moving expenses, such as travel and lodging, transportation of belongings and shipping cars and pets.
Moving expense reimbursements: Andy Phillips, director of H&R Block’s Tax Institute, said workers need to understand that the new tax rules require employers to include all moving expenses in the employee’s wages, which are subject to income and employment taxes.
Casualty losses: Personal casualty and theft losses are generally no longer deductible, Phillips said. But losses relating to what IRS refers to as a ”presidentially declared disaster area” would still be allowed as a deduction.
Employee business expenses: Here’s one that caught many by surprise on 2018 returns. Employees are no longer permitted to deduct unreimbursed expenses that they incur for work. “If you’re in this situation,” Phillips said, “you may want to speak with your employer about possibly creating an accountable reimbursement plan.”
Got a job in the gig economy? The IRS kicked off a new Gig Economy Tax Center at www.irs.gov to offer tips and resources on questions relating to filing requirements, deductible business expenses and special rules for reporting vacation home rentals.
Do you have health insurance? You no longer need to offer proof that you had health insurance in 2019 or had a reason to be exempt.
No box exists any more relating to health care on the front of the 1040. And you won’t have to pay any penalty or claim any exemption if you did not have health insurance in 2019.
These key tax breaks are back and could boost your refund
Last year, some taxpayers dragged their feet when it came to filing their 2018 tax returns because they weren’t sure if Congress would extend some specialized tax breaks that expired at the end of 2017.
Why file a return in February or March if you’d soon need to amend it?
Well, Congress didn’t move quickly enough to meet the April 15 tax deadline but those key tax breaks were resurrected in a tax law signed by President Donald Trump in December 2019. The so-called extenders package would cover tax years for 2018, 2019, and 2020.
As a result, taxpayers who qualified for those breaks in 2018 may now want to consider whether they want to amend their returns, according to Susan Allen, senior manager for tax practice and ethics for the American Institute of Certified Public Accountants.
“Some folks could see a benefit in amending a 2018 return,” she said.
But you’d have to analyze whether the cost of amending that return exceeds how much money you’d save.
The zombie tax breaks are worth noting — and taking into account on 2019 returns and 2020 returns — include:
College tuition and fees. The above-the-line deduction of up to $4,000 for qualified college tuition and fees would reduce your income that’s subject to tax, and you don’t need to itemize to get this tax break. Income limits apply.
But Mark Steber, chief tax officer for Jackson Hewitt, notes that the deduction relating to college bills cannot be claimed if you’ve taken the American Opportunity or Lifetime Learning Credits.
And income limits will apply for the resurrected deduction. You could deduct up to $4,000 in qualified expenses if your modified adjusted gross income is up to $65,000, or up to $130,000 if you’re married and filing a joint return.
You can deduct up to $2,000 in expenses if you fall in the $65,001 and $80,000 range if single and the $130,001 and $160,000 range if married and filing a joint return.
Mortgage debt forgiveness. If you faced foreclosure and had up to $2 million in mortgage debt forgiven by a lender, you wouldn’t be required to report that forgiven debt as income.
The PMI tax deduction. Homeowners who made a small downpayment may be required to pay private mortgage insurance, known as PMI. You would need to itemize to take this tax break, so if you take the new higher standard deduction now, the return of this tax break would not help.
Medical expenses. For some families with big medical bills, here’s a tax break that you don’t want to ignore. Qualified medical and dental expenses will remain deductible on 2018 through 2020 tax returns. But, remember, you must pay attention to the threshold for taking such a deduction. You can deduct unreimbursed medical expenses to the extent that they exceed 7.5% of adjusted gross income.
Alimony deduction disappears
For recently divorced Americans, alimony payments are no longer tax deductible by the payer. They are also not considered or included as taxable income by the parent receiving support, which ends a decades-long practice.
The change affects divorce agreements signed after Dec. 31, 2018. Those who divorced in 2019 can’t write off alimony payments on their returns anymore.
The move, however, is beneficial to alimony recipients in most cases, experts say. That’s because they are no longer required to claim alimony as income and won’t pay tax on it.
“This is a way for the IRS to get rid of the deduction so that they’re always collecting a tax on alimony,” says Christina Taylor, head of operations at Credit Karma Tax. “This is going to have a bigger impact on a person paying alimony.”
It could also affect social programs that alimony recipients qualify for since their income will appear lower than it actually is. If they’re not required to report alimony income for health care, their income will be lower and they could potentially get a better subsidy, Taylor says.
There’s a new form for seniors
The two-page form, known as 1040-SR, uses a bigger font than the standard 1040 form and is better at contrasting colors. Taxpayers who turned 65 on or before Jan. 1, 2020, can use the new form for the 2019 filing year.
This could make filing easier for those who don’t file electronically, experts say.
It’s similar to the 1040-EZ, a form the IRS discontinued and was replaced with the redesigned 1040 form. It also allows you to report Social Security benefits and distributions from qualified retirement plans or annuities.
Still, the number of Americans filing by paper is small, according to Kathy Pickering, chief tax officer at H&R Block.
“People probably aren’t going to the library to fill out paper forms,” Pickering says. “Our statistics say that 97% of taxpayers use some kind of filing assistance, either through tax software or going to a professional.”
Tax cuts are set to expire after 2025
The windfall from the tax cuts in recent years has helped boost corporate profits and put money in consumers’ pockets. But concerns have grown on how Americans will be affected when those tax cuts expire.
Corporate rate cuts are permanent following the tax overhaul. All individual tax cuts, however, are set to end after 2025. That means most Americans will end up with a tax increase, experts caution, unless some or all provisions are extended.
By 2027, about 35 million households with incomes below $200,000 would face tax increases, according to the Joint Committee on Taxation. Roughly 9.5 million of them could see increases of more than $500 apiece, the study showed.
“Americans can expect higher taxes in the future,” says Ric Edelman, co-founder of financial advisory firm Edelman Financial Engines. “It will be a dominant issue in the 2024 campaign, and the answer will be determined by who’s president when the tax cuts expire.”
Read more at usatoday.com