Tax reform ushered in major changes for the U.S. taxation system for the 2018 tax year, with the Tax Cuts and Jobs Act introducing new rates and brackets, expanded deductions and credits, and new limits on certain tax breaks. You probably had to do some pretty substantial tax planning to cut your tax bill due this spring, by taking full advantage of these adjustments.

While the 2019 tax year is shaping up to be much quieter in terms of big tax-law changes, you can't afford to get complacent. Every year, American tax law sees some changes, and keeping up with the latest events can prevent you from paying the government more than you have to. Here's a comprehensive look at how to make the smartest possible tax plan for the 2019 tax year.

Numbers 2019 in sparkler-type flame.

Image source: Getty Images.

What are the tax brackets in 2019?

Tax brackets define what rate, or percentage, that you have pay in tax, based on the income you earn. Under our progressive tax system, the more money an earner makes, the higher percentage of tax is owed on every extra dollar of income.

However, you don't pay the marginal tax rate from your top tax bracket on every dollar you earn. Instead, you receive the benefit of lower tax rates for certain parts of your income, in a graduated manner.

Changes to the income tax brackets for 2019 were limited to the annual inflation adjustments that happen every year, called cost-of-living adjustments or COLAs. Apart from that, expect the same basic structure as 2018, with the same seven tax rates applying to the various brackets. The actual income amounts of the brackets depend on your tax filing status. Accordingly, you'll see five sets of income tax brackets for 2019 below.

If you're single, the following tax brackets apply:

Income Bracket for Singles

Tax Is This Amount Plus This Percentage

Of the Amount Over

$0 to $9,700

$0 plus 10%

$0

$9,700 to $39,475

$970 plus 12%

$9,700

$39,475 to $84,200

$4,543 plus 22%

$39,475

$84,200 to $160,725

$14,382.50 plus 24%

$84,200

$160,725 to $204,100

$32,748.50 plus 32%

$160,725

$204,100 to $510,300

$46,628.50 plus 35%

$204,100

Above $510,300

$153,798.50 plus 37%

$510,300

Data source: IRS.

Those who qualify as head of household have higher income thresholds applied for each tax bracket, resulting in lower tax. To qualify as a head of household, the requirements include that you be unmarried and provide both housing and financial support for a child, parent, or other relative who lives with you for greater than half of the year. The financial support you provide must generally be more than half of all support the child or other relative received during the year in order to claim head of household status.

Bracket for Head of Household

Tax Is This Amount Plus This Percentage

Of the Amount Over

$0 to $13,850

$0 plus 10%

$0

$13,850 to $52,850

$1,385 plus 12%

$13,850

$52,850 to $84,200

$6,065 plus 22%

$52,850

$84,200 to $160,700

$12,962 plus 24%

$84,200

$160,700 to $204,100

$31,322 plus 32%

$160,700

$204,100 to $510,300

$45,210 plus 35%

$204,100

Above $510,300

$152,380 plus 37%

$510,300

Data source: IRS.

Most married taxpayers file jointly. If you were married but your spouse passed away recently, then you're also allowed to use these brackets as a surviving spouse.

Bracket for Married Filing Jointly

Tax Is This Amount Plus This Percentage

Of the Amount Over

$0 to $19,400

$0 plus 10%

$0

$19,400 to $78,950

$1,940 plus 12%

$19,400

$78,950 to $168,400

$9,086 plus 22%

$78,950

$168,400 to $321,450

$28,765 plus 24%

$168,400

$321,450 to $408,200

$65,497 plus 32%

$321,450

$408,200 to $612,350

$93,257 plus 35%

$408,200

Above $612,350

$164,709.50 plus 37%

$612,350

Data source: IRS.

Some married taxpayers choose to file separate returns. These are the brackets that apply.

Bracket for Married Filing Separately

Tax Is This Amount Plus This Percentage

Of the Amount Over

$0 to $9,700

$0 plus 10%

$0

$9,700 to $39,475

$970 plus 12%

$9,700

$39,475 to $84,200

$4,543 plus 22%

$39,475

$84,200 to $160,725

$14,382.50 plus 24%

$84,200

$160,725 to $204,100

$32,748.50 plus 32%

$160,725

$204,100 to $306,175

$46,628.50 plus 35%

$204,100

Above $306,175

$82,354.75 plus 37%

$306,175

Data source: IRS.

Finally, there are some trusts that get taxed as separate legal entities. The same is true of estates of someone who passes away. These brackets are also important for those whose children who have enough unearned income to be subject to the kiddie tax.

Bracket for Trusts and Estates

Tax Is This Amount Plus This Percentage

Of the Amount Over

$0 to $2,600

$0 plus 10%

$0

$2,600 to $9,300

$260 plus 24%

$2,600

$9,300 to $12,750

$1,868 plus 35%

$9,300

Above $12,750

$3,075.50 plus 37%

$12,750

Data source: IRS.

What is the 2019 tax rate on capital gains?

Investors enjoy a tax break on certain types of investment income. Dividends that certain stocks regularly pay investors is income that qualifies for lower tax rates; so do the profits on investments that you sell after having held them for longer than a year. These qualified dividends and long-term capital gains are eligible to get taxed at 0%, 15%, or 20%, producing substantial savings.

Before tax reform, the rules for the lower rates on these types of investment income were simpler. Taxpayers in the old 10% and 15% brackets paid 0%, those in the 25% to 35% brackets paid 15%, and those in the top 39.6% bracket paid 20%.

Rules after tax reform aren't as simple because they refer to somewhat antiquated legal provisions. Accordingly, people with qualified dividend income or long-term capital gains need to refer to the brackets below to determine which tax rate applies to them.

Tax Rate on Income

Single

Married Filing Jointly

Head of Household

Married Filing Separately

0%

Up to $39,375

Up to $78,750

Up to $52,750

Up to $39,375

15%

$39,375 to $434,500

$78,750 to $488,850

$52,750 to $461,700

$39,375 to $244,425

20%

Above $434,500

Above $488,850

Above $461,700

Above $244,425

 Data source: IRS.

To take advantage of these lower rates, taxpayers have two options. First, try to meet the requirements for qualified dividend income because nonqualified dividend income is taxed at the higher ordinary income tax rate.

Also, if you sell an investment you've held for a year or less, then it's treated as short-term capital gain rather than long-term, and short-term gains are also taxed at regular tax rates. If you have the foresight to choose your investments carefully and adopt a longer-term investing strategy, tax laws will reward you with lower rates.

What is the standard deduction for 2019?

The standard deduction took on extra significance in 2018 because of the big boost in the size of the tax break. The standard deduction is important because it allows you to reduce the amount of income you earn that's subject to tax, and you're able to use it automatically without doing any extra work to demonstrate that you qualify for other available tax deductions. One big part of tax reform resulted in standard deduction amounts nearly doubling between 2017 and 2018. 

The only changes to the standard deduction for 2019 reflected the inflation adjustments for the year. You can see in the table below that the changes were relatively minimal, although getting an extra few hundred dollars of tax-free income will be at least somewhat valuable.

Filing Status

Standard Deduction for 2019 Tax Year

Change From 2018

Single

$12,200

+$200

Married filing jointly

$24,400

+$400

Head of household

$18,350

+$350

Married filing separately

$12,200

+$200

Data source: IRS.

In addition to these base amounts, those who are 65 or older or are blind get to take additional amounts as a standard deduction. For those who are married, the added amount is $1,300, while singles get to add $1,650. The married amount is the same as in 2018, but the single amount is $50 higher. If you're 65 or older and blind, then you can boost your standard deduction by double the relevant amount. Moreover, for joint filers, each spouse has an opportunity to get these added amounts. So for a married couple in which both spouses are over 65 and both are blind, the standard deduction would increase by $5,200 -- or $1,300 times four.

Most minor children don't have to file taxes at all, but if they have income from a job or from investments held in their name, then it's possible that they will need to file. If so, they typically aren't allowed to claim the full standard deduction. Instead, they're subject to reduced standard deductions. For them, a standard deduction of at least $1,100 is available, which is $50 more than in 2018. Those who have earned income from a job or other source get a standard deduction of at least their total earned income plus $350 more, until that amount rises above the regular standard deduction shown in the table above.

The most popular tax credits for 2019

Tax credits are extremely valuable breaks for taxpayers. Credits lead to a greater reduction in tax than deductions because they are directly applied to your tax bill in a dollar-for-dollar manner. For instance, a $1,000 credit would cut your tax bill by $1,000, but a $1,000 deduction would reduce your taxes by less than $1,000 -- more specifically, typically somewhere between $100 and $370 under current tax law. In particular, the following tax credits are among the most common and can produce significant savings. 

The earned income tax credit (EITC) gives sizable reductions in taxes to workers with low- or mid-level incomes. The credit amount varies by family size and income, with a maximum of $6,557 for filers with three or more children, $5,828 for those with two children, $3,526 for those with one child, or $529 for those with no children. The income limits below indicate which taxpayers are eligible for at least some of the earned income credit, but bear in mind that the top credit amount phases out gradually over a large portion of the income range.

Filing Status

Income Limit if No Children

Income Limit if 1 Child

Income Limit if 2 Children

Income Limit if 3+ Children

Single, head of household, or widowed

$15,570

$41,094

$46,703

$50,162

Married filing jointly

$21,370

$46,884

$52,493

$55,592

Data source: IRS.

A special thing about the earned income tax credit is that even if you don't owe anything in taxes, you can still get the credit amount back from the IRS in the form of a refund. As you can imagine from the chart, a credit of several thousand dollars for workers earning less than $55,000 -- in some cases, much less -- can make a big financial difference for families struggling to make ends meet.

The child tax credit is a simple provision, paying $2,000 for each eligible child. To qualify, children must be 16 or younger at the end of the tax year, and the person claiming the credit must live with the child for more than half the year and provide at least half of the child's financial support. Also, to get the full credit, your income must be no greater than the below amounts.

Filing Status

2019 Income Threshold

Single, head of household, or qualifying widow(er)

$200,000

Married filing jointly

$400,000

Married filing separately

$200,000

Data source: IRS.

If your income is above these thresholds, you lose $50 in credits for every $1,000 you make above the corresponding threshold.

Two different tax credits provide financial relief to people paying educational costs. The American Opportunity tax credit pays 100% of eligible tuition and required fees up to $2,000, and another 25% of the next $2,000, making for a total maximum credit of $2,500 per year. It's available for four years of undergraduate education, and taxpayers can claim the full credit if they make up to $80,000 for singles or $160,000 for joint filers. Reduced amounts are available for incomes up to $90,000 for singles or $180,000 for joint filers.

Meanwhile, the Lifetime Learning tax credit offers additional educational tax breaks beyond traditional college. A 20% credit on up to $10,000 in eligible expenses every year is available to taxpayers making less than $58,000 if they're single or $116,000 if they're filing jointly. This credit is available for graduate school, vocational training, and certain other nontraditional educational expenses.

Finally, the Saver's tax credit pays as much as $1,000 per person to encourage retirement contributions. Depending on your income, you can get a credit for 10%, 20%, or 50% of up to $2,000 in contributions to an IRA, 401(k), or similar retirement account. The following income limitations apply.

Credit Percentage

Single or Married Filing Separately

Head of Household

Married Filing Jointly

50% of contribution

$0 to $19,250

$0 to $28,875

$0 to $38,500

20% of contribution

$19,250 to $20,750

$28,875 to $31,125

$38,500 to $41,500

10% of contribution

$20,750 to $32,000

$31,125 to $48,000

$41,500 to $64,000

Data source: IRS.

No credit is available to those earning above the top amounts, as the Saver's credit is generally intended for low- to middle-income taxpayers.

The most popular tax deductions for 2019

Deductions aren't as valuable as tax credits, because they don't produce dollar-for-dollar reductions in tax.

For every $1 you're allowed to deduct from taxable income, you'll save a percentage equal to your marginal tax rate. So if you're in the 24% tax bracket, then a $1 deduction will save you $0.24 in tax. Yet even though those amounts are smaller than what you get from a tax credit, deductions are nothing to sneeze at.

The below deductions are only available if you itemize deductions. Tax filers who take the larger standard deduction won't receive any extra benefit from these deductible items, and with the standard deduction continuing to rise for inflation, fewer taxpayers are likely to have enough itemized deductions to go above the standard deduction amount.

These are the most popular deductions for 2019:

  • The mortgage interest deduction allows homeowners to deduct interest on up to $750,000 of mortgage debt, with higher grandfathered deductions on up to $1 million in debt applying to those who had such mortgages outstanding before the beginning of 2018. Certain home equity loans used to purchase, build, or improve your home also qualify for the interest deduction.
  • Donations to qualified charities are eligible for a deduction as well. Cash and check donations are deductible and full, and most gifts of property are also deductible up to their fair market value. The key to claiming charitable deductions is to make sure you get the appropriate acknowledgment from the charity that you made the gift, because you'll need that documentation in order to support your deduction in case you're audited.
  • The state and local tax (SALT) deduction was limited by tax reform, but it hasn't disappeared entirely. In 2019, you'll be allowed to deduct up to $10,000 for money you pay to state and local governments in tax. Property tax is always allowed, and you can elect either income or sales tax depending on which amount is higher.

Retirement tax planning for 2019

Managing retirement accounts is an important part of tax planning. Not only do some retirement plan contributions earn you valuable deductions right now, but you also get a chance to put off paying taxes on the income produced by your retirement savings for years until you withdraw the money in retirement.

Each year, the contribution amounts and income limitations change for IRAs, 401(k)s, and other retirement plans, so it's critical to keep up to date on these annual changes in order to make the most of these valuable tax benefits. If you miss an annual change, then you might save less than you could have.

IRA contribution limits will go up in 2019 to $6,000 for those younger than 50 and $7,000 for those 50 or older. That's $500 higher than 2018's levels.

There are two different types of IRAs -- traditional and Roth -- and different limits apply to each. For Roth IRAs, contributions are prohibited if you make more than a certain amount of income, and the maximum contribution amount is reduced if your income falls into the phaseout range in the chart below. For traditional IRAs, contributions are always allowed, but if you or your spouse are also covered by an employer-sponsored plan at work, you can only deduct those contributions if your income falls below a certain upper limit.

If your income falls above the phaseout ranges below, you can only deduct a portion of the contributed amount.

Filing Status

Roth IRA Phaseout Range

Traditional IRA Phaseout Range if Worker Has Employer-Sponsored Retirement Account

Traditional IRA Phaseout Range if Spouse Has Employer-Sponsored Retirement Account

Single

$122,000 to $137,000

$64,000 to $74,000

N/A

Married filing jointly

$193,000 to $203,000

$103,000 to $123,000

$193,000 to $203,000

Married filing separately

$0 to $10,000

$0 to $10,000

$0 to $10,000

Data source: IRS.

In addition, 401(k) contribution limits are on the rise for 2019. People younger than 50 can contribute up to $19,000 toward a 401(k) or similar plan in 2019, up $500 from last year's $18,500. Those 50 or older get to put up to $25,000 into a 401(k). With no income limits applying to 401(k)s, those whose employers offer these plans can save a lot toward retirement.

Some employers offer different alternatives for workers. For instance, the SIMPLE IRA is easier to administer than a 401(k), making it a popular choice among small businesses. Yet employees can still set aside substantial amounts in a SIMPLE IRA -- up to $13,000 if you're younger than 50 or $16,000 if your 50 or older in 2019.

Using other tax-favored accounts in 2019

Beyond retirement savings vehicles, there are other tax-favored accounts you can use to save for your financial future, including:

  • 529 plans let you set aside money toward educational costs in accounts that generate tax-free income. As long as you use the money for qualifying expenses, then you'll never pay tax on the money. With generous contribution limits that in most states are well into six figures, these accounts offer a substantial amount of flexibility with no income-based restrictions on their use.
  • Coverdell ESAs have similar features to 529 plans, offering tax-free growth on investments toward educational costs. However, Coverdells have advantages and disadvantages compared to 529 plans. You're free to invest Coverdell money in nearly any type of investment you want, but annual contributions are limited to $2,000. Moreover, income limits of $95,000 to $110,000 for single filers and $190,000 to $220,000 for joint filers apply to reduce or eliminate the ability to make Coverdell contributions.
  • Health savings accounts are available to those who have high-deductible health insurance coverage and who want to set money aside to cover healthcare costs. Contribution amounts of up to $3,500 for those with self-only policies or $7,000 for family policies apply in 2019, with minimum annual deductibles of $1,350 or $2,700, respectively, required to qualify for high-deductible health plan status. Catch-up contributions of $1,000 are available if you're 55 or older, but a qualifying plan must have maximum out-of-pocket expenses of $6,750 for self-only policies or $13,500 for family coverage.

Estate taxes in 2019

Finally, a few aspects of gift and estate tax planning will see changes in 2019. The tax laws impose estate tax on your total assets when you die, but there's an amount called the federal gift and estate tax lifetime exclusion amount that's exempt from estate tax. This lifetime exclusion amount will rise to $11.4 million in 2019, up from $11.18 million in 2018. That means that if the value of everything you own when you die is less than $11.4 million, you won't have to worry about estate taxes. 

Gifts to others during your lifetime are also subject to federal tax under the gift tax rules. However, you're allowed to give up to $15,000 to anyone you want in 2019 without any gift tax implications. That number's unchanged from 2018 levels. Moreover, unlimited gifts to spouses and charities are available, as are tax-free gifts to educational institutions or healthcare facilities to pay educational or medical costs. Because of those provisions along with the lifetime exemption, most people don't have to worry about ever paying any estate or gift tax.

Be tax smart this year!

As long as this guide might seem, it still only scratches the surface of some of the most important tax issues for individual taxpayers. For instance, business owners have plenty of other provisions to consider. As a quick example, if you're self-employed and run your own business as a sole proprietor or unincorporated entity, then the provisions under the Tax Cuts and Jobs Act that provide for a partial deduction of your qualified business income can save you a lot of money. Businesses established as corporations could benefit from lower corporate tax rates. But business tax planning is a topic that could command a full-length guide of its own.

No matter how complicated or simple your personal situation is, it's never too early to think about tax planning for the coming year. By getting an early start on the 2019 tax year and using and referring to this guide to 2019 taxes throughout the year, you'll be in much better shape to take advantage of all the favorable provisions that can result in a lower tax bill this year and beyond.

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