Listen Live
Praise 102.5 Featured Video

What you need to know about the 2019 tax changes.

Provided by The Motley Fool

Matthew Frankel, CFP, Contributor

The Tax Cuts and Jobs Act is the most significant set of changes to the U.S. tax code in several decades. The vast majority of the changes go into effect for the 2018 tax year, which is the return that you’ll file with the IRS in the spring of 2019.

Here’s a rundown of what Americans need to know about the recent tax changes that could affect individual taxpayers in the upcoming tax season.  These changes, which are mandated by the new tax legislation for individual filers, are set to expire in 2025, unless they get extended.

Tax brackets — Still seven, but with different rates

One of the headline changes made by the Tax Cuts and Jobs Act was a general lowering of U.S. tax rates. While the number of tax brackets remained at seven, the rates were generally lowered, with the exception of the minimum tax rate staying at 10% for the poorest Americans.

In addition to lower tax rates, the income thresholds were increased, particularly at the higher tax brackets. In other words, the highest tax brackets now apply to fewer (higher-earning) Americans than it did previously. For example, before the passage of the Tax Cuts and Jobs Act, the top tax rate was 39.6% and applied to married couples filing jointly who earned more than $480,050. With tax reform, that top rate was lowered to 37% and only applies to married couples making more than $600,000 in taxable income, much more income than before.

Here’s a look at the tax brackets in effect for the 2018 tax year, which will apply to the next tax return you’ll file in 2019.

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,526-$38,700 $19,051-$77,400 $13,601-$51,800 $9,526-$38,700
22% $38,701-$82,500 $77,401-$165,000 $51,801-$82,500 $38,701-$82,500
24% $82,501-$157,500 $165,001-$315,000 $82,501-$157,500 $82,501-$157,500
32% $157,501-$200,000 $315,001-$400,000 $157,501-$200,000 $157,501-$200,000
35% $200,001-$500,000 $400,001-$600,000 $200,001-$500,000 $200,001-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $300,000


Additionally, the IRS recently announced the updated inflation-adjusted 2019 tax brackets, which will be used on the tax return you’ll file in 2020 for income you’ll earn during the 2019 calendar year:

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,700 $0-$19,400 $0-$13,850 $0-$9,700
12% $9,701-$39,475 $19,401-$78,950 $13,851-$52,850 $9,701-$39,475
22% $39,476-$84,200 $78,951-$168,400 $52,851-$84,200 $39,476-$84,200
24% $84,201-$160,725 $168,401-$321,450 $84,201-$160,700 $84,201-$160,725
32% $160,726-$204,100 $321,451-$408,200 $160,701-$204,100 $160,726-$204,100
35% $204,101-$510,300 $408,201-$612,350 $204,101-$510,300 $204,101-$306,175
37% Over $510,300 Over $612,350 Over $510,300 Over $306,175


Annual adjustments will be different

Before the 2018 tax year, inflation adjustments to things like the tax brackets, standard deduction, and other tax provisions had been based on the CPI-U (consumer price index for all urban consumers). This index tracks a basket of goods and services that affects the typical U.S. household, so it made sense that it was used to gradually increase tax-related figures over time.

The new tax law uses a metric known as the Chained CPI instead, which makes the assumption that if a particular good or service becomes too expensive, consumers will begin buying a cheaper alternative. Without getting too deep into a discussion about the Chained CPI, the effect is that the index grows at a slightly slower rate over time than other forms of the CPI.

This is a relatively subtle change and unlikely to have a big impact on a year-to-year basis. However, because Chained CPI increases at a slower pace over time, it could have a big impact on the inflation adjustments to the tax code over decades. Simply put, the long-term effect of this means that the higher tax brackets will begin to apply to lower-income taxpayers, as real inflation will (theoretically) rise faster than the income thresholds of the marginal tax brackets.

Most education tax breaks remain

The two popular tax credits for college expenses, the American Opportunity Credit and the Lifetime Learning Credit, both survived tax reform unscathed. These are designed to lower the tax bills of people who paid college tuition. The American Opportunity Credit applies to tuition paid toward a degree or certificate program but only for the first four years of college, while the Lifetime Learning Credit applies to nearly all tuition and fees.

However, it’s worth noting that the tuition and fees tax deduction is no longer available, as the Bipartisan Budget Act of 2018 only made it available through the 2017 tax year — although it’s possible that Congress will still choose to extend it. Previously, certain taxpayers who couldn’t qualify for one of the two credits could deduct as much as $4,000 worth of tuition and fees as an adjustment to income. Now, taxpayers who can’t qualify for either credit are out of luck.