I’m not really going to say much about death today; I just wrote that so you’d start reading this. Somehow the topic of taxes doesn’t seem to ignite the average person’s interest.
But there were some pretty dramatic changes last tax year, and I thought it might be useful to give you some of the highlights. I hope this will help you think ahead about your taxes for 2019 and do some planning.
Note: all of the changes below expire at the end of 2025, so everything goes back to how it was in 2017 after that.
1. New 20% qualified business income deduction: sole proprietors, partnerships, LLCs and S Corporations now receive a 20% deduction on their qualified business income. Qualified business income is just about everything except services (like consulting). But if you own a service business, you can still claim the deduction if your income is less than $157,500 for singles or $315,000 for couples. Above those amounts, the deduction phases out.
2. Entertainment expenses: businesses were no longer able to deduct entertainment expenses starting in 2018. This is a big one for business owners who like to take clients to a sporting event or concert…or any kind of entertainment venue. No more deductions for that!
3. Limitations on deductions for employee fringe benefits: companies are facing lower deductions on expenses like entertainment, meals, and transportation for their employees. For companies like Google, who provide free lunches for employees, this could be a real hit to the pocketbook. Personally, I would hate to see those lunches go away since I get to smell the deliciousness every day…my office is located right across the street.
1. Tax rates: some tax brackets dropped up to 4 percentage points. This could save you some money through 2025.
2. Standard deduction: the standard deductions increased to $24k for couples filing jointly, $18k for heads of households, and $12k for singles and couples filing separately. Personal exemptions are going away, but these changes mean that more people may just take the standard deduction and forget about itemizing.
3. Estate tax: the federal estate tax exemption went up to $11.4 million per person for 2019. This means that you won’t pay federal estate tax unless your estate is worth more than $11.4 million, but don’t forget that life insurance, homes, and all of your property will typically count toward the $11.4 million. And don’t forget about state estate tax; for example, in the lovely state of Washington the exemption is only about $2.193 million. I will stop short of recommending that you die before the end of 2025 to take advantage of the higher exemption. But you might want to talk to your estate planning attorney if you are at all close to these exemption limits.
I also recommend that you talk to a tax professional to see how the latest tax changes will impact you, and to set up a strategy for taking advantage of any breaks you will get before 2025. Comment below to ask questions or share your insight.