IN THE NEWS
The following are tax rules and limits for the UPCOMING 2019 tax year. Many of the limits mentioned below are changes that went into effect with the Tax Cuts and Jobs Act on January 1, 2018. This information can be used to help you plan for the new year.
The tax rates for 2019 are the same as last year, but the income ranges have increased slightly. They are:
Tax Rate SINGLE FILERS Taxable Income Between MARRIED FILING JOINTLY Taxable Income Between 10% $0—$9,700 $0-$19,400 12% $9,701—$39,475 $19,401-$78,950 22% $39,476 —$84,200 $78,951-$168,400 24% $84,201—$160,725 $168,401-$321,450 32% $160,726—$204,100 $321,451-$408,200 35% $204,101 —$510,300 $408,201-$612,350 37% Over $510,300 Over $612,350
The 0% tax rate on capital gains and qualified dividends still exists. Previously, the 0% tax rate applied to filers who fell in the 15% or lower tax bracket. Since there is no longer a 15% tax bracket, a dollar amount has been established, which equates to the new 12% bracket. That amount is now $78,950 for married filers and $39,475 for single filers.
The limit for contributions into a 401(k) and 403(b) INCREASES by $500 to $19,000 (plus a $6,000 “catch-up” for those age 50 or older). The limit for contributions to a Simple IRA also increases to $13,000 (plus a $3,000 “catch-up” for those 50 or older).
The maximum contribution limit for Traditional or Roth IRAs INCREASES IN 2019 FOR THE FIRST TIME SINCE 2013. The limit is now $6,000 for those under age 50 and $7,000 for those age 50 or older. As always, you OR your spouse must have earned income equal to at least the amount of your total contributions in order to make a Traditional or Roth contribution.
Taking the deduction for Traditional IRA contributions may be limited for those who participate in an employer-sponsored retirement plan. The AGI income phase-out increases to $103,000-$123,000 for marrieds, $64,000-$74,000 for singles, and $0-$10,000 for married filing separately. Where only one spouse is active in a plan, the phase-out increases slightly to $193,000-$203,000 but $0 for married filing separately.
The income limit for making Roth IRA contributions also increases slightly with the phase-out at $193,000-$203,000 for married filers, $122,000-$137,000 for single filers, but $0-$10,000 for married filing separately.
The personal exemption was REPEALED in 2018 and no longer exists.
The standard deduction for 2019 rises to $24,400 for married filers (plus $1,300 for each spouse age 65 or older), $12,200 for single filers (plus $1,650 if age 65), and $18,350 for heads of household (plus $1,650 if age 65).
There continues to be no limitation on the total amount of Schedule A, itemized deductions. However, taxpayers are limited to claiming no more than $10,000 of the total of all state and local income taxes, sales taxes, and real property taxes on Schedule A.
Required minimum distributions from IRAs for those age 70-1/2 and older can still be made as contributions to charitable organizations without being considered taxable income.
The threshold for deducting medical expenses claimed on Schedule A for 2019 increases back to expenses in excess of 10% of AGI.
Itemized deductions subject to the 2% floor (such as investment expenses, tax preparation fees, and unreimbursed employee business expenses) were repealed in 2018.
Interest on home equity loans is no longer be deductible unless the loan is used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
Beginning with divorces in 2019, alimony payments to an ex-spouse are no longer deductible and will not be taxable income to the recipient.
The child tax credit doubled last year to $2,000 per qualifying child under the age of 17. Additionally, a $500 credit is available for qualifying children age 17 or older. The phase-out doesn’t begin until income (MAGI) exceeds $400,000 for married filers and $200,000 for all others.
For individuals who pass away in 2019, the Federal estate and gift tax exemption increases to $11,400,000.
The annual gift tax exclusion remains at $15,000 per recipient.
The Social Security wage base for this payroll tax INCREASES from $128,400 to $132,900 for 2019.
Americans collecting Social Security benefits are expected to receive a 2.80% increase in their 2019 monthly benefits. The Medicare Part B premium increases to $135.50 per month.
Those collecting Social Security before full retirement age (who are between the ages of 62 and 66) can earn $17,640 in 2019 without losing benefits. But individuals who reach their Full Retirement Age during 2019 can earn up to $46,920 in the months before reaching FRA without losing benefits.
The American Opportunity Education Tax Credit still exists. The maximum credit is $2,500 per student for qualifying expenses made within the first four years of post-secondary education. The credit phases out for married filers with income between $160,000—$180,000 and single filers with income between $80,000-$90,000.
For those not eligible for the American Opportunity Credit, the Lifetime Learning Education Credit offers a maximum credit of $2,000. It phases out for married filers with income between $116,000-$136,000 and single filers with income between $58,000-$68,000.
Qualified withdrawals from 529 Education Savings Accounts have expanded to allow distributions of up to $10,000 per beneficiary for education other than higher education. In other words, distributions can now be made for elementary and secondary school, not just college.
The contribution limit to Health Savings Accounts (“HSAs”) increases slightly to $3,500 for single coverage and $7,000 for family coverage. HSA owners age 55 or older can contribute an additional $1,000. As always, you can make the contribution only if you have a “high- deductible health plan”, which now means having insurance coverage with an annual deductible of at least $1,350 on single coverage and $2,700 on family coverage. In addition, the out-of- pocket maximum threshold is now $6,750 on single and $13,500 on family coverage. Please be aware that distributions cannot be made to pay for insurance premiums unless for they are paid under COBRA, while receiving unemployment, or if age 65 or older.
The standard mileage rate for 2019 increases to 58 cents per mile for business driving, 20 cents per mile for medical purposes but remains at 14 cents per mile for charitable driving.
The income level in 2019 to qualify for a health premium tax credit when purchasing “Obamacare” health insurance through the exchange is $100,400 for a family of four or $48,560 for singles.
Sources: Internal Revenue Service; National Association of Tax Professionals; Social Security Administration; Kiplinger; Centers for Medicare & Medicaid Services.
During the last three months of 2018, few investors were immune to the volatility in both the stock and bond markets. Regardless of whether or not you owned a diversified portfolio, you likely experienced an overall loss for 2018. Nearly every U.S. stock sector, nearly every type of bond, and nearly every country realized negative returns for 2018. Specifically, the S&P 500 ended the year down - 6.2%, the Dow ended down - 5.6%, and the Nasdaq ended down - 3.9%, making it the worst year in terms of annual performance for all three since 2008. Frankly, that’s not bad considering we saw four hikes in interest rates last year and were in the tenth year of an economic recovery.
Last year started with a brief correction to U.S. stocks. They recovered shortly thereafter, gradually increasing to their peak in the Fall. At that point, we were showing gains for the year. Then, in early October, the downturn began as investors’ fears increased due to tensions over trade with China, interest rates continuing to rise, and the strong dollar. All these factors put pressure on both stocks and bonds. The S&P 500 fell nearly 20% in December from its October peak.
Knowing we are now in the very late stage of the economic recovery, what can we expect for 2019? Uncertainty over China’s slowing economy and trade disputes with the U.S. will continue to have an impact on global markets. U.S. economic growth is expected to be slower but not yet recessionary, declining from 3% GDP growth to 2%-2.5% by the end of 2019. In addition, more rate hikes are expected by the Fed before they pause sometime later this year or next, despite economic growth beginning to slow. Does this mean we are headed toward a recession? If so, what impact might this have on the stock markets?
Though we are getting closer to the possibility of a recession, it is not a foregone conclusion, as yet. Currently, research suggests the U.S. economy is not exhibiting any of the obvious excesses or imbalances that historically have foreshadowed economic contractions or recessions. But it’s hard to pinpoint the beginning of a recession. Unfortunately, you don’t know it’s happening until it’s already happened. The stock market typically peaks on average six months prior to a recession. If this proves to be true and the 2019 forecast for economic growth is correct, we could be in a recession in 2020. However, the markets haven’t always accurately predicted a recession. As wittingly stated by Rob Lovelace of American Funds, “the market has predicted 9 out of the last 5 recessions”. Fortunately, the average length of a recession going back to 1945 is approximately 11 months. Since that time, stocks have gained 53% of the time during a recession, while losing 47% of the time.
In the coming months, there likely will be more downside to come. If that’s the case, why not get out? The reason is because market timing or jumping in and out can be very costly. If you can’t predict the right time to get out as well as the right time to get back in, you can do your portfolio more harm than good. Additionally, moving to cash could cost fees and cause income tax consequences, depending on the type of account involved. On the other hand, if you have an account invested in the market that you will need to spend or will deplete within the next year or two, you should consider selling. Also, keep some liquid money out of the market to draw on for upcoming expenses or emergencies in order to avoid having to sell during market downturns. In the end, downturns in the market don’t last forever. In looking at the Dow from 1900 to 2015, the average length of market downturn of as much as 20% was only 338 days (or less than one year). In the meantime, take advantage of market downturns as buying opportunities with longer-term money.
In conclusion, we have been managing our clients’ portfolios mindful that we were approaching the late stage of this economic recovery for some time. We continue to employ diversification and include holdings that offer downside protection, all in line with the client’s objectives and risk tolerance. Diversification will not prevent losses but could improve overall results in the long run. If your needs or goals are changing, however, this would be a reason to review your investment strategy and portfolio to determine if adjustments are necessary.
Sources: American Funds; Hays Advisory; Marketwatch; National Bureau of Economic Research.
Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities.