As suspected, the passage of the Tax Cuts and Jobs Act (TCJA) at the end of 2017 had a huge impact on the 2019 individual filing season, with far-reaching effects on taxpayers. Absent future legislation, most of the key individual tax provisions took effect January 1, 2018, and will expire December 31, 2025. For a complete guide to TCJA related issues, visit BKD’s Tax Reform Resource Center.
While tax reform has generated a lot of questions in 2019, additional guidance has been issued throughout the year in some key areas:
Mortgage Interest Deduction on Home Equity Loans
- In February 2019, the IRS advised taxpayers that in many cases they can continue to deduct interest paid on home equity loans.
- Under the TCJA, the deduction for interest paid on home equity loans was suspended for tax years 2018 through 2025. A new lower dollar limit of $750,000 on mortgages originating after December 15, 2017, that qualify for the deduction was imposed as well.
- The IRS clarified that a qualified mortgage includes the combined amount of loans used to “buy, build or substantially improve” the taxpayer’s main home and second home, regardless of how the loan is labeled.
- As under prior law, the loan must be secured by the qualified residence and meet other requirements.
- With the combination of an increased standard deduction and the $10,000 state and local tax (SALT) limitation, the number of taxpayers itemizing their deductions continues to decline.
- For 2019, the standard deduction has been increased to $24,400 for taxpayers who are married filing jointly (MFJ), $12,200 for single filers and $18,350 for heads of household.
Getting Ready for Retirement
- The U.S. Department of the Treasury (Treasury) has published inflation-adjusted limits for retirement savings for 2019.
- Contribution limits to an individual retirement account have been increased to $6,000 for 2019, with those age 50 and over getting an extra $1,000.
- If you participate in a 401(k) or similar plan at work, you can contribute up to $19,000 for 2019. There’s an additional $6,000 catch-up contribution limit for those age 50 and over.
Gift & Estate Tax News
- The TCJA doubled the estate and gift tax exclusion from a base of $5 million to $10 million for individuals who pass away after December 31, 2017, and before January 1, 2026. As under prior law, the exclusion is adjusted each year for inflation.
- For 2019, the exclusion amount is $11.4 million.
- Barring future legislation, there have been questions as to what happens if an individual has gifted to someone else using the greater exemption amount, but dies after the exclusion reverts back to the base amount of $5 million in 2026 (as adjusted for inflation).
- The IRS issued “anti-clawback” proposed regulations.
- The proposed regulations state that if at the time of a decedent’s death, the allowable exclusion amount is less than exclusion at the time of prior gifts, the estate tax credit may be based on the greater of the two credit amounts.
- This is good news for taxpayers, but it’s also important to keep in mind as part of an overall gift and estate planning strategy. If the increased gift tax exemption amount isn’t used before the statutory sunset of the higher basic exclusion amount at the end of 2025, it will be lost.
Section 199A Qualified Business Income Deduction
- The new Internal Revenue Code (IRC) Section 199A qualified business income (QBI) deduction is available to individual taxpayers and certain trusts and estates. The deduction generally is equal to 20 percent of the taxpayer’s QBI. Taxpayers are allowed an additional deduction that applies to 20 percent of the taxpayer’s qualified real estate investment trust dividends and income from a publicly traded partnership received during the year, as well as a deduction that’s only applicable to owners of a specified agricultural or horticultural cooperative.
- QBI includes income from a sole proprietorship, individually held qualified rental real estate and qualified income passed through from an S corporation or partnership.
- The §199A deduction is relatively straightforward for taxpayers with taxable income below the 2019 thresholds of $321,400 and $160,700 for MFJ and all others, respectively.
- Once the taxable income threshold is met, complicated limitations are phased in. When taxable income reaches the 2019 upper thresholds of $421,400 (MFJ) and $210,700 (all others), all limitations apply, including no deduction for a trade or business that is determined to be a specified service trade or business (SSTB).
- There also is an overall limitation to the deduction applicable to all taxpayers related to taxable income.
- For income to be QBI, it must be derived from an activity that rises to the level of a trade or business under IRC §162. This also applies to rental activities and has generated numerous questions from taxpayers and tax preparers alike.
- In January 2019, Treasury and the IRS issued final regulations related to the §199A deduction. They help answer many outstanding questions, including further clarification of what activities rise to the level of a qualified trade or business and defining an SSTB.
- The IRS also issued Notice 2019-07, which provides a safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of §199A.
For more on these and other developments for individual taxpayers, reach out to your BKD trusted advisor or complete the Contact Us form below.