The U.S. Bureau of Labor Statistics reported today that the consumer price index (CPI) has increased by .2% for August, the same as in July. The CPI measures the cost of goods and services – in other words, your cost of living. When the CPI doesn’t change much, it tends to signal that interest rates will stay put. This is important information for taxpayers because the Tax Code provides for mandatory annual adjustments to certain tax items based on inflation.
That said, there’s a change in the way that the Internal Revenue Service (IRS) will figure cost-of-living adjustments for 2019. As part of the Tax Cuts And Jobs Act, the “normal” CPI has been replaced with a “chained” CPI. The chained CPI measures consumer responses to higher prices rather than simply measuring the higher prices. What that means for taxpayers is that inflation adjustments will appear smaller.
(You can find some examples of how the chained CPI works here.)
Inflation and cost-of-living adjustments are routinely included in tax legislation – that’s why you’ll see changes from year to year in everything from standard deduction amounts to federal gift tax exemptions. To help you with your tax planning, Bloomberg Tax released a first look at predicted rates for 2019.
“While the IRS won’t announce actual inflation adjustments for next year for some time, our projections help taxpayers and tax planners get a jumpstart on the 2019 tax planning season by allowing them to more accurately estimate their tax liabilities for the upcoming year,” said George Farrah, Bloomberg Tax Editorial Director. “This process is especially important for 2019 because most of the changes under the 2017 tax act will be in effect. Taxpayers and their advisors should pay close attention to the impact of inflation adjustments determined using the chained CPI index on income tax bracket thresholds and other tax amounts.”
Personal Exemption Amounts
As part of the TCJA, there are no personal exemption amounts for 2019. Personal exemptions used to further decrease your taxable income before you determined your tax. You were generally allowed one exemption for yourself (unless you could be claimed as a dependent by another taxpayer), one exemption for your spouse if you filed a joint return, and one personal exemption for each of your dependents – but that’s no longer the case.
(For more on what’s changed under the TCJA, click here.)
Also note that for purposes of the definition of a qualifying relative, the exemption amount is deemed to be $4,200 ($4,150). The first amount, $4,200, is the amount that Bloomberg Tax believes is the literal application of the applicable IRC provision, but the amount in parentheses is the amount they expect the IRS to publish.
(For more on the recent IRS guidelines on qualifying relatives for purposes of the expanded child tax credit, click here.)
As part of the TCJA, the amount of the standard deduction doubled for most taxpayers in 2018. The increase means that more taxpayers are expected to opt for the standard deduction over claiming itemized deductions. With inflation, those amounts will edge up slightly. Here are the projected standard deduction amounts for 2019:
Also, for 2019, it’s predicted that the standard deduction for an individual who may be claimed as a dependent by another taxpayer will not exceed the greater of:
- $1,100, or
- the sum of $350 plus the individual’s earned income.
The additional standard deduction amount for the aged or the blind will be $1,300. The additional standard deduction amount will increase to $1,650 if the individual is also unmarried and not a surviving spouse.
For those high-income taxpayers who itemize their deductions, the Pease limitations, named after former Rep. Don Pease (D-OH) used to cap or phase out certain deductions. However, as a result of the TCJA, there are no Pease limitations in 2019.
Section 199A deduction (also called the pass-through deduction)
As part of the TCJA, sole proprietors and owners of pass-through businesses are eligible for a deduction of up to 20% to bring the tax rate lower for qualified business income. The deduction is subject to certain threshold and phased-in amounts. For 2019, those amounts will look like this:
Retirement Savings Accounts
For 2019, Bloomberg Tax projects the maximum contribution limit for traditional and Roth IRAs will edge up to $6,000 for individuals under age 50 with catch-up contribution totals hitting $7,000 for individuals age 50 and above.
(For comparison, you can see the 2018 numbers from Forbes’ Ashlea Ebeling here.)
Federal Estate Tax Exclusion
The federal estate tax exclusion for decedents dying in 2018 was $11.2 million. BNA projects this amount will boost to $11.4 million – per person – thanks to the TCJA.
Gift Tax Exclusion
The annual exclusion for federal gift tax purposes will remain at $15,000 in 2019. That means that you can gift $15,000 per person to as many people as you want with no federal gift tax consequences in 2019; if you split gifts with your spouse, that total is $30,000 per person.
(You can see the 2018 numbers from Forbes’ Ashlea Ebeling for estate and gift tax here.)
This should be enough to get your tax planning started for 2019. You may need to do a withholding check-up to make sure that you’re on track. For more on how to check your withholding, click here. To find out how to make adjustments on your form W-4, click here.
Remember, however, that these are just projections. The Internal Revenue Service (IRS) will publish the official tax brackets and other tax numbers for 2019 later this year, likely in October.
The 2019 tax projections are just one of the features from Bloomberg Tax. The full report is available for free here.