Once again, in 2017, the federal government pledged to simplify the income tax code. And they did…sort of. The Tax Cuts and Jobs Act of 2017 had a lot to unpack. Some things changed. A few stayed the same. It’s a lot to digest, even after filing in 2019. Now seems like a good time to put some of the changes in tax law in one place, plus highlight a few items that differ for filing in April 2020.

New Form

Well, it’s the same old Form 1040, but with a sporty new look. 

• It has larger type.
• It contains other visual changes to help older tax filers and those with diminished sight.
• The IRS put the chart of standard deductions on the form itself, so you don't have to look it up.
• Eligible taxpayers can choose between the new 1040-SR or stay with the traditional 1040; there’s no mandate to use the new and “improved” form.

The new form was released in time for the 2019 filing season.

Changes in Tax Brackets

Congress made changes to the income tax brackets and the marginal tax rates.

• There are still seven brackets, but the rates changed. 
• The income thresholds are higher, especially in the higher brackets.
• For filing season 2020, the tax brackets for 2019 are adjusted for inflation.

In general, taxes were reduced except for the minimum tax rate, which stayed at 10%.

Changes in the Annual Adjustment Calculations

It used to be those inflation adjustments to tax brackets, the standard deduction, and other provisions were based on the consumer price index for all urban consumers, the CPI-U. While the index increased, taxes increased gradually over time.

Now the IRS uses the “chained CPI.” This metric assumes that if a specific good or service becomes too expensive, consumers will buy a less costly version. The impact as the index grows more slowly than other forms of the consumer price index, meaning taxes won’t increase as much or as quickly as before.

The effect is subtle, but over the coming years, you will be able to discern the difference.

Was this a change for the better? It didn’t really simplify anything, but in a decade or so, you could see some savings.

Change in the Standard Deduction

And now for the change everyone has been waiting for. The standard deduction changed with the new tax law. It got bigger. Yay.

• For single filers in 2018, the deduction increased from $6,500 to $12,000, nearly doubling the deduction. Even better, in 2019, the deduction is increased to $12,200.
• Heads of household saw their deduction rise from $9,550 to $18,000 last April. For 2019 it adjusts to $18,350.
• Married filing jointly went from $13,000 to $24,000 in 2018, then to $24,400 in 2019.

Kinda makes up for the disappearance of the personal exemption, doesn’t it? Actually, it more than makes up for it. The personal exemption was just over $4,000. When you do the math, you realize the new standard deduction gives that back plus more. 

If it still hurts, it's just due to general principles. Nobody likes to have stuff taken away. But it's OK. This is a good thing.

Expanded Child Tax Credit and 529 Plan

Besides doubling the standard deduction, the feds also doubled the child tax credit. So, if you have kids, here's another bonus. More of the credit is refundable, and the restrictions on income have been relaxed.

• The credit doubled to #2,000 per qualifying child under 17 years old.
• Up to $1,400 is refundable, even if you don’t owe any taxes. 
• Income phase-out thresholds are substantially increased from previous levels. More taxpayers get the break than before.

For example, someone filing as single now has a maximum of $2,000 for full credit, phasing out at $240,001. 

Remember, a credit is not the same as a deduction. A deduction lowers the amount of income you get taxed on. A credit reduces the tax you owe, dollar for dollar. Credits are better than deductions any day.

The 529 College Savings Plan now allows the use of the funds for qualifying educational expenses at any level of schooling, not just college. Coverdell ESAs already did this. So, if you want to send your kid to private high school, you may be able to use your 529 to help. Just check for qualifications.

The Dreaded Alternative Minimum Tax (ATM)

Good news.

• The AMT is now indexed for inflation. It didn't used to be, and it was starting to affect people in lower tax brackets than intended.
• The AMT amounts and phase-out limits are substantially higher. Phase-out for married filing jointly, in particular, went way up from 2017, from $160,900 to $1M in 2018.
• Inflation raises the married filing jointly exemption by $2,300 and the phase-out by $20,000 for 2019.

Now, you can breathe a sigh of relief. 

And Now, For Something Completely Different

This is going to sound a little strange, but the IRS has ruled that the health portion of those genetic testing kits qualify as medical care for tax purposes.

Most of these kits report a list of diseases or conditions you might be predisposed to genetically. Because of that, you can deduct a portion of the cost of the kit as a medical expense. Alternatively, you can use tax-qualified money like that in your health savings account or flexible spending account to partially pay for the kit.

Of course, this opened the door for potential deductions for smartwatches and smartphone apps that monitor bodily conditions and other health-related feedback. We'll get back to you on how the arguments turn out.

Another change includes the expansion of the definition of preventive care under high-deductible health plans (HDHP). The definition of preventive care under these plans now includes certain medical services and drugs for chronic diseases. 

Now, the medical insurance can cover all or part of these costs from the first dollar, regardless of how much of the annual deductible the taxpayer has satisfied.

Preventive care now includes statins for heart disease or diabetes, beta-blockers for congestive heart failure, blood pressure monitors for high blood pressure, some SSRIs for depression, and other expenses.

Caveat: the IRS says the insurance company can do this, not that it has to. 

As mentioned, there's a lot to unpack with the Tax Cuts and Jobs Act. Changes are still rolling out, and everyone has to get used to the ground shifting a bit. Overall, most of the eliminated items are balanced by new or expanded exemptions and deductions. 

Taxes are still confusing, though, so if you do not have a typical tax situation, don’t hesitate to call Top Tax Defenders for assistance.