Welcome to Part 4 of the ol' blog's 2019 series on tax inflation adjustments.
We started on Nov. 15 with a look at next year's income tax brackets and rates.
Today we look at changes to credit and deduction amounts.
Note: The 2019 figures apply to 2019 returns to be filed in 2020.
For comparison purposes, you'll also find 2018 amounts to be used
in filing 2018 returns due April 15, 2019.
Taxpayers depend each year on tax deductions and tax credits to cut their annual tax bills.
The biggies are, of course, the use of standard or itemized deductions discussed in Part 2 of this year's inflation adjustments series.
But various other deductions, which reduce the amount of income that's subject to taxation, and the even better tax credits, which are dollar-for-dollar reductions of any tax you owe, also can cut tax bills.
And many of them are adjusted each year due to inflation. Here's how some of these popular — and valuable — tax deductions will look in 2019.
Adoption tax credit, employer assistance: Ask any parent, having kids costs a lot. There are myriad tax breaks to help moms and dads deal with child-related expenses, including help in the form a tax credit and tax-free employer assistance for folks who grow their families through adoption.
There was some concern last year during the hurried consideration of the Tax Cuts and Jobs Act (TCJA) that this that this tax break was in danger. However, after hearing from parents and adoption support groups, lawmakers decided to preserve the federal assistance for adoptive families.
And where a U.S. child with state-determined special needs is adopted, the new parents generally are eligible for the maximum amount of the tax credit in the year the adoption is final.
In 2019, a company can provide eligible adoptive parents up to $14,080 in in tax-free help to cover associated costs. That up from the $13,810 allowed in 2018.
Even if adoptive parents don't get help from their employers in 2019, they can claim next year an adoption credit of up to that same $14,080 amount. Again, this is an increase from the 2018 amount of $13,810.
Both the adoption income exclusion and tax credit amounts will begin to phase out in 2019 when individuals have modified adjusted gross incomes (MAGI*) greater than $211,160. Once the adoptive parents hit MAGI next year of $251,160, they cannot claim the tax-favored adoption assistance.
*Shameless plug for the ol' blog's glossary, which explains MAGI as well as many other tax term definitions.
The 2019 hikes are a substantial $3,580 more than the 2018 income phaseouts starting at MAGI of $207,580 and ending when adoptive parents' modified income is $247,580 or more.
Depending on the adoption's cost, you may be able to claim both the tax credit and the exclusion. However, you can't double dip; that is, you cannot claim both a credit and exclusion for the same adoption expenses.
Note, too, that the tax credit is not refundable. That means you can use the amount to reduce any tax you owe to zero, but if you have extra credit after that, you won't get it as a refund.
Lifetime Learning Credit: This Lifetime Learning Credit also is nonrefundable, but it's still worthwhile since it can help pay not only higher education costs, but also continuing education courses once you're out of school, such as a class you took to improve your workplace skills.
This educational tax credit is worth a possible maximum of $2,000. However, that amount is reduced if you make what the IRS considers a lot of money.
For the 2019 tax year, a single filer earning $58,000 or more will see a reduction in the Lifetime Learning tax breaks. That's doubled — $116,000 if you're as bad at doing math in your head as I am — if you're married and file a joint tax return. In either situation, hit the MAGI number and you'll lose part of the Lifetime Learning Credit.
That's $1,000 more than the $57,000 MAGI limit for 2018 taxes ($2,000 more for married filing jointly taxpayers in 2019 than the $114,000 threshold in 2018).
Student loan interest: Among the many costs of raising kids is paying for college. That's why so many students and/or their families take out loans to pay for higher education.
One of the many income adjustments, popularly known as above-the-line deductions, is the ability to offset a portion of those higher education loans. During tax reform discussions, many of the income adjustments were on the chopping block, but the student loan interest one survived.
That $2,500 tax break is still in the tax code. And that amount of deductible educational loan interest is set by law, which means in 2019 it's stuck at level.
But if you make more than a certain amount, you won't even be able to deduct that statutorily locked-in amount.
In 2019, your student loan interest deduction isn't reduced until you, as a single taxpayer, have MAGI of more than $70,000 or $140,000 if you're married and file jointly. The interest deduction is eliminated if your MAGI as a single taxpayer is $85,000 or more or $170,000+ for married joint filers.
That's a bit more than the 2018 income phaseout limits of $65,000 for a single taxpayer or $135,000 for married jointly filing couples. The interest deduction in 2018 is eliminated when MAGI as a single taxpayer is $80,000 or more or $165,000+ for married joint filers.
Savings Bond exclusion for higher education: Savings bonds are another way to help pay for some higher education costs.
Interest earned on eligible Series EE and I bonds issued after 1989 is not taxed as long as the bond owner uses the redeemed bonds to pay qualified higher education expenses at an eligible institution.
In addition to meeting certain requirements, there's also an income limit for the education-related savings bond interest exclusion.
This exclusion will start phasing out in 2019 for those with MAGI of more than $121,600 on joint returns and $81,100 for all other filers. The tax-free savings bond interest exclusion is completely phased out for joint filers with MAGI of $151,600 and $96,100 or more for all other returns.
That's a hike over 2018's exclusion phaseout/elimination of more than $119,550 for joint filers and $79,700 for other taxpayers. This current tax year, you cannot claim the savings bond interest exclusion for educational use at all if your MAGI as a joint filer is $149,550 or more or is $94,700 or more if you file using one of the other filing statuses.
Educators' expenses deduction: Tax breaks are for more than just students. Elementary and secondary school teachers, along with certain other educators, can claim some of their out-of-pocket classroom expenses as an above-the-line deduction.
This $250 tax break was made a permanent part of the tax code as part of 2015 tax extenders bill (formally known as the Protecting Americans from Tax Hikes or PATH Act). PATH also initiated inflation tweaks to this amount.
Sorry, but inflation adjustments won't help here. There is no change to the $250 educator expenses deduction in 2019.
That's the same low-dollar level that it's been stuck at since 2017, even though studies show that the amount is not nearly enough to cover teachers' out-of-pocket classroom costs.
Earned Income Tax Credit, or EITC: The Earned Income Tax Credit (EITC), which was created in the 1970s as an outgrowth of President Lyndon B. Johnson's War on Poverty, is a major tax break for middle- and lower-income workers. It is not changed under the new tax laws.
For the 2019 tax year, the maximum credit amounts, determined by your family size, are:
- $6,557 for taxpayers filing jointly who have three or more qualifying children,
- $5,828 with two qualifying children,
- $3,526 with one qualifying child and
- $529 if you don't have any qualifying children.
Even better, these amounts are refundable, meaning any credit amount that is more than your tax bill comes back to you as, per its name, an IRS refund.
Of course, the key to claiming the EITC is to fall within the tax credit's earnings' guidelines.
If you don't make enough you can't claim it. Make more, and the credit amount is reduced. And if you make what is deemed too much, you can't claim the EITC at all.
For the 2019 tax year, inflation adjustments mean that your earned and adjusted gross income (AGI) each must be less than the following amounts in order to claim any EITC amount:
3 or More Children
In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. For 2019, that amount is $3,600.
For comparison purposes, the 2018 tax year EITC maximum earnings limits — revised (aka reduced) to meet the Tax Cuts and Jobs Act's requirement that they be calculated using the chained consumer price index (CCPI) — are:
3 or More Children
The investment income cap this year is $3,500.
And the maximum EITC amounts for 2018 are:
- $6,431 for taxpayers filing jointly who have 3 or more qualifying children,
- $5,716 with two qualifying children,
- $3,461 with one qualifying child and
- $519 if you don't have any qualifying children.
Retirement Saver's Credit: This tax break is a great one for folks who are doing the right thing by saving for their post-work years. It's also one that they too often overlook.
It appeared that I did the same when I originally posted these tax credit and deduction inflation figures.
In my defense, the Saver's Credit adjustments for the 2019 tax year are part of another post, the one on how higher costs of living affect a variety of retirement tax breaks. Those figures are always announced separately and before the main IRS inflation adjustments notice.
But, as an eagle-eyed reader noted in the comments below, the Saver's Credit should be noted here, too. So here's my acknowledgement of it. Check out the retirement inflation post, linked in the previous paragraph, for the 2019 details.
Transportation fringe benefits: Commuting can tax your patience. Maybe you should find out if your workplace-provided health care benefit pays for yoga classes, since you're no longer going to get any tax help here.
Under prior tax law, when a company helped cover the cost of workers' commutes, either via mass transit passes or part of parking, that assistance was tax-free. For the 2018 tax year, that means a workplace transportation fringe benefit of up to $260 is not counted as income to you at tax time.
Not so in 2019 and, under the TCJA, through 2025. The new tax law says that employers no longer can deduct fringe benefits offered commuting employees by subsidizing some or all of their parking, transit, and vanpooling costs. The new law also suspends bicycle commuting reimbursement from the definition of qualified transportation fringe benefits.
Some companies may still provide this workplace perk as an employee recruiting or retention tool and absorb the tax costs themselves.
Workplaces that continue to offer transportation benefits in 2019 can provide $265 a month to employees for commuter highway vehicle travel to and from work, any transit pass or qualified parking, up from $260 for tax year 2018.
Others companies, however, probably will eliminate employee transportation fringe benefits. That means those workers will be spending part of any TCJA tax cuts they see on paying for parking and commuting to work.
Whoa! That's a big bite of tax inflation numbers, both for this tax year and adjusted for inflation in 2019, even when parceled out for just one item in the 10-part inflation series.
But the ones that apply to your tax circumstances are worth checking out as potential ways to cut your tax bill, both for this and next tax year.
More inflation figures: As noted in the intro to this post, you can read the first part of the 2019 tax inflation series with details on next year's tax rates and income brackets.
At the end of that post there's an index of what's coming up in the series, along with links to inflation pieces already published.