The recent Tax Cuts and Jobs Act (TCJA) was a sweeping tax package enacted about two years ago, with most changes effective for tax years beginning in 2018 through 2025. As way of reminder, below are some of the more major changes that have been in effect for a couple years now along with some new items for the 2019 tax year.
Individual Income Tax
- Oregon Kicker. Oregon recently authorized “kicker” refund credits that will reduce Oregon tax for 2019. The “kicker” credit is 17.171% of your 2018 Oregon tax liability on your 2018 Form OR-40, Line 22.
- Health care “individual mandate.” For 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
- Regular tax rates. The TCJA law modified (lowered) the seven tax brackets that now range from 10% – 37%. The top 37% rate applies to taxable income above $510,300 for single filers, and $612,350 for joint filers.
- Capital gain rates. The maximum tax rates applicable to net capital gains and qualified dividends were not changed. Therefore, the maximum capital gain rate is still 20%. Taxpayers in lower brackets benefit from the 0-15% rates. Taxpayers in higher brackets should anticipate an additional 3.7% federal net investment income tax as well on investment income.
- Standard deduction. The standard deduction is $24,400 for joint filers, $18,350 for heads of household, and $12,200 for singles and married taxpayers filing separately.
- Personal exemptions. Due to the TCJA personal exemptions are no longer allowed like in 2018.
- Child and family tax credit. The credit for qualifying children (i.e., children under 17) is still $2,000, and is refundable up to $1,400. It still includes a $500 (nonrefundable) credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out is $200,000 ($400,000 for joint filers).
- State and local taxes. The itemized deduction for state and local income and property taxes is still limited to a total of $10,000. Property taxes remain 100% deductible, not subject to this limitation, if they qualify as a business expense and are deducted on a schedule other than Schedule A.
- Home mortgage interest. Under the TCJA, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000, starting with loans taken out in 2018. And there is still no longer any deduction for interest on home equity loans, regardless of when the debt was incurred, unless the home equity loan relates to home acquisition indebtedness.
- Miscellaneous itemized deductions. There is still no deduction for miscellaneous itemized deductions. This category previously included deductible items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
- Medical expenses. Medical expenses are deductible to the extent they exceed 10 percent of adjusted gross income for all taxpayers.
- Alimony. For post-2018 divorce decrees and separation agreements, alimony is not deductible by the paying spouse and is not taxable to the receiving spouse. Payments under prior decrees remain deductible and taxable.
- New Forms W-4 for Oregon and Federal withholding: If not already completed, employees will need to complete or update their Federal and Oregon Form W-4’s to calculate employee withholdings correctly.
Business Income Tax
- New Oregon Corporate Activity Tax (CAT). On May 16, 2019, House Bill 3427 was signed into law by Governor Kate Brown, as an addition to the state’s corporate income tax. Quarterly estimated tax payments will be required beginning in April 2020. The tax will be assessed on a calendar-year basis beginning on January 1st, 2020 with the first returns due under the new law on April 15th, 2021. The tax applies to corporations, partnerships, limited liability companies, S corporations and the business activities of individuals, estates, and trusts. Additionally, the CAT does not exclude out-of-state sellers. The CAT equals $250 plus 0.57% of Oregon-source commercial activity over $1,000,000 and applies to sales of product or services sourced within the State of Oregon.
- Corporate tax rate. The corporate tax rate (C corporations) remains a flat 21%.
- Deduction for “qualified business income.” Taxpayers are allowed a federal (not Oregon) deduction equal to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. Certain limitations apply, including wage limitations and income from specified service trades or businesses.
- Oregon PTE. The Oregon pass-through entity (PTE) tax rate (7.5%) applies to proprietorships, S Corporations, and LLC’s who have qualifying wages.
- Section 179. The expensing limit for 2019 is $1,020,000, subject to phaseout between $2,550,000 and $3,570,000 of annual purchases.
- Bonus depreciation. For property placed in service in 2019, 100% expensing is available. Purchases can be either ‘new’ or used. Previous versions of the law excluded ‘used’ purchases.
- Entertainment expenses. Entertainment expenses are no longer deductible.
- Meals expenses. Under the current law, most meals are 50% deductible. The office/holiday party is still 100% deductible.
- NOL’s. Net operating losses must be carried forward, except for farming losses that are limited to a two-year carryback.
- Qualified Opportunity Funds (QOF). The TCJA included two elections, one to defer gain from the sale of property invested in an investment QOF and another to permanently exclude gain from the sale or exchange of the investment in the QOF. These elections can provide substantial tax benefits for taxpayers who can satisfy the detailed and complex set of rules.
- UNICAP. UNICAP rules (Section 263A) have required capitalization of preproduction costs for permanent farm crops and certain overhead for manufacturers (food processors) and construction contractors. The law exempts businesses with less than $25 million revenue. Farms have been allowed to elect out of these rules in the past but have been required to use an alternate style of depreciation limiting use of bonus depreciation (farm buildings have a 25-year life under ADS). The Internal Revenue Service has not ruled on what to do with these previous elections.
Estate and Gift Tax Changes
- Annual gifts– Each taxpayer can give away $15,000 annually, to as many individuals as desired, without being required to file an annual gift tax return to report the gift. The gift is not deductible by the donor nor is it taxable to the recipient.
- Federal estate tax exemption. The lifetime exclusion for individuals dying in 2019 is $11,400,000 ($22,800,000 maximum per couple). The amount is increased to $11,580,000 ($23,160,000 maximum per couple) for individuals dying in 2020.
- Oregon estate tax exemption. Oregon has not increased its exemption which is $1 million ($2 million per couple). Oregon residents that qualify for the Oregon Natural Resource Credit get an increased Oregon exemption amount.
Final Year End Tax Planning Ideas
- Postpone receipt of income until 2020 if you are a cash basis taxpayer (some businesses are accrual).
- Accelerate deductible expenses into 2019. This would include not only paying bills in hand but also considering prepaying bills due in the following year where possible. (note, credit card charges are deductible when incurred for cash basis taxpayers, not when the credit card liability is paid)
- Make fixed asset (machinery, equipment and vehicle) purchases before year-end. Remember, you don’t need to pay cash to claim the deduction. You just have to make a legal purchase (obtain title) and have the item in your possession by year-end.
- If you have an investment with a significant built-in (unrecognized) capital loss, consider selling the investment before year-end to recognize the loss as a deduction. Understand that capital losses are limited to $3,000 per year for joint filers ($1,500 for single filers) if there are no capital gains with balances carrying forward to future years.
- Consider opening and or funding retirement plans prior to filing your 2019 tax returns. Qualifying taxpayers can contribute to a traditional IRA and/or other similar retirement plans and receive a tax deduction as long as they are funded by the due date of the tax return. For most taxpayers the due date of their 2019 tax return is April 15, 2020.
- Business owners should reimburse themselves before year-end for any business miles on personal vehicles at the standard mileage rate as well as any expenses they may have made personally on behalf of the business.