2018 had some major tax changes due to the Tax Cuts and Jobs Act. And while we’re still recovering from these changes (or still working through them with our extended filers), it’s time to start looking into what tax problems we’ll be working with for the 2019 tax year.
Most of the changes to the 2019 tax year are provisions of the Tax Cuts and Jobs Act that didn’t go into effect in 2018 but will be in effect for 2019. Knowing what these changes are and how they will affect your clients will give you a head start in filing 2019 tax returns once next year rolls around.
1. Filing On Time
It sounds silly, but 1 out of every 5 people do not file their taxes on time, or they don’t file them at all. This is an ongoing problem, one tax preparers should be ready for every year; however, the intricacies and complications brought on by the Tax Cuts and Jobs Act has made filing late an even more common occurrence as taxpayers try to navigate the waters of a new tax law. Not filing on time will lead to late penalties for your clients, so getting ahead of the game early, hiring needed help, and automating processes now will help you keep track of client returns and ensure they’re filing on time.
2. Reporting All Income
Again, another one that sounds silly, but between regular jobs, side hustles, rental markets, and passive income, more and more people are working with multiple income streams. You may have a client who works a nine-to-five job, owns a graphic design company, and has a detached studio she uses for short-term rentals. Being aware that clients may have multiple income streams will help you accurately report all of their income and help them avoid facing any penalties. Be sure to ask plenty of questions related to income streams and stress to your clients the importance of reporting this income.
3. Quarterly Estimated Tax Payments
Again, the job market looks completely different today than it did 20 years ago. Many people are freelancers or are self-employed, and are generally required to make quarterly estimated tax payments. Since employers aren’t withholding taxes from a paycheck, freelancers and self-employed individuals are required to make quarterly payments to ensure the government gets their taxes.
As a tax preparer, you need to know if your client’s net earnings from self-employment are $400 or more. If so, they’ll need to make quarterly estimated tax payments. You’ll also need to help your clients estimate their quarterly estimated tax payments and put them on a schedule to pay on time. Failing to make payments, or underpaying, can lead to a big tax burden at year-end and potential late payment penalties and interest charges.
4. Increase in HSA Contribution Limits
A Health Savings Account (HSA) is a tax-free savings account used alongside a high deductible health plan to help people pay for medical expenses. HSA contributions escape Social Security and Medicare taxes – unlike the 401(k). Qualifying high-deductible HSA policies will see a boost in contribution limits in 2019. Below are the rates for 2018 and 2019, respectively:
| 2018 | 2019 | |
|---|---|---|
| Self-Only Coverage | $3,450 | $3,500 |
| Family Coverage | $6,900 | $7,000 |
5. Increase in Retirement Account Contribution Limits
Just like the HSA contribution, retirement account base contribution limits have also increased for the 2019 tax year. This is especially important for Roth IRA accounts, where money is taxed when it is put in but tax free when it is taken out, since there hasn’t been an account contribution increase for traditional or Roth IRAs since 2013. Below are the rates for 2018 and 2019, respectively:
| 2018 | 2019 | |
|---|---|---|
| 401(k) | $18,500 | $19,000 |
| Traditional and Roth IRA | $5,500 | $6,000 |
6. Return to the 10% Deduction for Qualifying Medical Expenses
For those with itemized deductions, the 2010 Affordable Care Act made it harder to reach the threshold for qualifying medical expenses by changing the threshold from 7.5% to 10% of adjusted gross income. The Tax Cuts and Jobs Act reversed this change in 2017 and 2018 by allowing qualifying medical expenses to be deducted if they met or exceeded 7.5% of a taxpayer’s adjusted gross income. However, in 2019, this was reversed back to the 10% from the Affordable Care Act. Preparers will need to keep this in mind for taxpayers who plan to itemize.
7. The Elimination of the Alimony Deduction
Alimony payments for divorce and separation agreements entered into during the 2019 tax year or any year thereafter will not be deductible. A spouse who pays alimony will not be able to deduct it and a spouse who receives alimony will not count it as income. This is a change that may cost some taxpayers thousands of dollars, so preparers need to know how to handle the payments for 2019.
8. The Elimination of the Federal Individual Mandate Penalty
The individual mandate penalty or shared responsibility payment applied to taxpayers who did not have insurance coverage and didn’t qualify for an exemption under the Affordable Care Act. Without health insurance or an exemption, a taxpayer was required to pay a penalty at the end of the year alongside their tax payment. This penalty is going away for the 2019 tax year. Those without health insurance this year will not have to pay the penalty when 2020 rolls around.
As we start to get into the last month of Q3 of 2019, it’s time to wrap up your 2018 returns and start preparing for the changes coming for 2019. Being aware of these 8 common tax problems that tax preparers will face next year will help you feel confident going into the 2020 tax season, and help you provide the best possible service to your tax clients.
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