Tax inflation adjustments expected to shrink
Bloomberg Tax and Thomson Reuters have released their 2019 projected inflation adjustments for a variety of tax-related items that are subject to change each year, but particularly after last year’s big tax overhaul.
Typically, items such as tax brackets and deduction amounts have been based on the Consumer Price Index for All Consumers, also known as CPI-U. But the passage last December of the Tax Cuts and Jobs Act changed the measure to so-called chained CPI, short for “Chained Consumer Price Index for All Urban Consumers” (C-CPI-U). The anticipated impact of using the new index is smaller inflation adjustments over time, as compared to what they would have been under the CPI-U. The cost of living calculated using the C-CPI-U has risen 39.7 percent since 2000, as opposed to a 45.7 percent gain using the CPI-U. The U.S. Bureau of Labor Statistics released the chained CPI changes on Thursday, prompting tax research services to release their predictions for tax-related items based on the inflation adjustments. The report from Bloomberg Tax is available at http://on.bna.com/CKtG30lOceb and from Thomson Reuters at tax.thomsonreuters.com/checkpoint/2019taxrates. The official numbers won’t be released until later this year, though, by the Internal Revenue Service.
Last December’s tax reform law changed much more than just chained CPI, of course, including eliminating personal exemptions and doubling the standard deduction amount.
“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 Bloomberg Tax editorial director George Farrah in a statement. “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.”
Last year’s tax overhaul also changed the amounts specified in several important provisions, Bloomberg Tax noted, including:
• Income thresholds for maximum capital gains rate brackets are adjusted for inflation beginning in 2019.
• Deduction for personal exemptions set at $0 through 2025.
• Standard deduction amounts substantially increased. The inflation-adjusted standard deduction amount for 2019 is $24,400 for married individuals filing joint returns and surviving spouses, $18,350 for heads of households, and $12,200 for all other taxpayers.
• Cost of depreciable business assets that a taxpayer may elect to expense under section 179 doubled from $500,000 to $1,000,000 ($1,020,000 for 2019). Annual investment limit (phaseout threshold) under §179 also increased to $2,500,000 ($2,550,000 in 2019).
• $25,000 limit on cost of SUVs that may be expensed under section 179 will be inflation-adjusted for the first time in 2019, to $25,500.
• AMT exemption amount, and taxable income amount at which AMT exemption begins to phase out, both substantially increased through 2025.
• $157,500 and $315,000 taxable income thresholds for application of the wage-basis limit and the specified service trade or business limit in computing the §199A qualified business income deduction are inflation-adjusted beginning in 2019 ($321,450 for married individuals filing joint returns, $160,725 for married individuals filing separate returns, and $160,700 for all other taxpayers for 2019).
Individual Income Tax Brackets
One of the biggest changes under the 2017 tax law was a new income rate structure under which individuals are taxed. Lower tax rates will generally be applied to higher tax brackets. Before the 2017 tax act, there were seven rates: 10, 15, 25, 28, 33, 35 and 39.6 percent. The new law keeps the seven-rate structure, but applies the following rates: 10, 12, 22, 24, 32, 35 and 37 percent. The rates are effective for tax years starting in 2018. But the lower rates are temporary. The pre-2018 rates will apply after Dec. 31, 2025.
The Thomson Reuters report also gives detailed projections of the inflation-adjusted amounts for the main individual items, expensing and various “small business” limitations, health, charitable, compliance and other specialty items, transfer tax and foreign items, and various civil penalties, equipping tax professionals, their clients, and compliance software developers with the information needed for tax planning and tax return preparation.
“Many tax provisions are subject to income-based thresholds, such as whether a taxpayer is subject to the new limitation on excess business loss,” said Catherine Murray, senior editor/author with the Tax Professionals business of Thomson Reuters, in a statement. “These projections will help taxpayers plan for the 2019 tax year, which could potentially involve accelerating or deferring income before year-end.”
Thomson Reuters pointed out that the TCJA—like most new legislation—contains a number of errors and ambiguities and hasn’t yet been subject to a technical corrections bill. Where these issues arise in the context of inflation adjustments, Thomson Reuters tax experts interpreted provisions of the new tax law in the way that seemed the most consistent with congressional intent, reflecting the assumption that these ambiguities will eventually be resolved accordingly. While these projections reflect the best judgment of the experts at Thomson Reuters, it’s worth noting that there are instances where the statute could be interpreted in a contrary manner.
Bloomberg Tax projected the 2019 income tax rate tables shown below. The tables for other filing situations are included in Bloomberg Tax’s full report.
Married Filing Jointly and Surviving Spouses
|
Pre-Tax Reform Rates (Before 2018 and After 2025) |
Tax Reform Rates (2018 to 2025) with 2019 Inflation-Adjusted Amounts |
| 10% – $0 to $19,050 | 10% – $0 to $19,400 |
| 15% – $19,051 to $77,400 | 12% – $19,401 to $78,950 |
| 25% – $77,401 to $156,150 | 22% – $78,951 to $168,400 |
| 28% – $156,151 to $237,950 | 24% – $168,401 to $321,450 |
| 33% – $237,951 to $424,950 | 32% – $321,451 to $408,200 |
| 35% – $424,951 to $480,050 | 35% – $408,201 to $612,350 |
| 39.6% – $480,051 or more | 37% – $612,351 or more |
Unmarried Individuals (other than Surviving Spouses and Heads of Households)
|
Pre-Tax Reform Rates (Before 2018 and After 2025) |
Tax Reform Rates (2018 to 2025) with 2019 Inflation-Adjusted Amounts |
| 10% – $0 to $9525 | 10% – $0 to $9,700 |
| 15% – $9,526 to $38,700 | 12% – $9,701 to $39,475 |
| 25% – $38,701 to $93,700 | 22% – $39,476 to $84,200 |
| 28% – $93,701 to $195,450 | 24% – $84,201 to $160,725 |
| 33% – $195,451to $424,950 | 32% – $160,726 to $204,100 |
| 35% – $424,951 to $426,700 | 35% – $204,101 to $510,300 |
| 39.6% – $426,701 or more | 37% – $510,301 or more |
Personal Exemption and Standard Deduction
The new tax law suspends the deduction for personal exemptions for tax years starting after Dec. 31, 2017, and before Jan. 1, 2026. Previously, most taxpayers were entitled to claim a personal exemption for each member of their household.
The standard deduction went up significantly for all taxpayers for tax years starting after Dec. 31, 2017. When figuring their deductions, taxpayers can elect to take the higher of their itemized deductions or the standard deduction. The higher standard deduction means fewer taxpayers will itemize their deductions. The new standard deduction amounts will be adjusted for inflation for tax years starting after Dec. 31, 2018, and are scheduled to sunset Dec. 31, 2025.
| Filing Status | Pre-Tax Reform Standard Deduction (Before 2018 and After 2025) | Tax Reform Standard Deduction with 2019 Inflation-Adjusted Amounts |
| Married Filing Jointly/Surviving Spouses | $12,700 | $24,400 |
| Heads of Household | $9,350 | $18,350 |
| All Other Taxpayers | $6,350 | $12,200 |
Alternative Minimum Tax
The new tax law temporarily raises the AMT exemption amounts for individuals. The AMT exemptions are projected for 2019 as follows:
| Filing Status | Pre-Tax Reform AMT Exemption Amount (Before 2018 and After 2025) | Tax Reform Exemption with 2019 Inflation- Adjusted Amount |
| Married Filing Jointly/Surviving Spouses | $86,100 | $111,700 |
| Unmarried Individuals (other than Surviving Spouses) | $55,300 | $71,700 |
| Married Individuals Filing Separate Returns | $43,050 | $55,850 |
| Estates and Trusts | $24,600 | $25,000 |
By: Michael Cohn of taxprotoday