Bloomberg Tax Projects Smaller Post-Tax Reform Inflation Adjustments
One of the most important changes under the 2017 tax act was a new income rate structure under which individuals are taxed. Lower tax rates will generally be applied to higher tax brackets.
Sep. 13, 2018
Bloomberg Tax opened a window onto next year’s tax planning landscape with the release of its 2019 Projected Inflation Adjustments, a detailed and comprehensive projection of inflation-adjusted tax items based on changes in the chained Consumer Price Index (chained CPI), which were released today by the U.S. Bureau of Labor Statistics. The projections provide early notice of the amount of tax savings that will be realized by taxpayers as a result of increases to standard deduction amounts, upward adjustments to tax brackets, and increases in hundreds of other key thresholds. The full report is available at http://on.bna.com/CKtG30lOceb.
The key change this year is a change in the index used to compute cost-of-living adjustments. The 2017 tax act replaced the Internal Revenue Code’s traditional inflation index, the Consumer Price Index for All Urban Consumers (CPI-U), with a different inflation index known as “chained CPI,” short for “Chained Consumer Price Index for All Urban Consumers” (C-CPI-U). The expected effect of using the new index is smaller inflation adjustments over time, as compared to what they would have been under the CPI-U. The cost of living calculated using the C-CPI-U has risen 39.7% since 2000, compared with a 45.7% gain using the CPI-U.
The 2017 tax act also changed the amounts specified in several key provisions, including:
- Income thresholds for maximum capital gains rate brackets are adjusted for inflation beginning in 2019.
- Deduction for personal exemptions set at $0 through 2025.
- Standard deduction amounts substantially increased. The inflation-adjusted standard deduction amount for 2019 is $24,400 for married individuals filing joint returns and surviving spouses, $18,350 for heads of households, and $12,200 for all other taxpayers.
- Cost of depreciable business assets that a taxpayer may elect to expense under §179 doubled from $500,000 to $1,000,000 ($1,020,000 for 2019). Annual investment limit (phaseout threshold) under §179 also increased to $2,500,000 ($2,550,000 in 2019).
- $25,000 limit on cost of SUVs that may be expensed under §179 will be inflation-adjusted for the first time in 2019, to $25,500.
- AMT exemption amount, and taxable income amount at which AMT exemption begins to phase out, both substantially increased through 2025.
- $157,500 and $315,000 taxable income thresholds for application of the wage-basis limit and the specified service trade or business limit in computing the §199A qualified business income deduction are inflation-adjusted beginning in 2019 ($321,450 for married individuals filing joint returns, $160,725 for married individuals filing separate returns, and $160,700 for all other taxpayers for 2019).
“While the IRS won’t announce actual inflation adjustments for next year for some time, our projections help taxpayers and tax planners get a jumpstart on the 2019 tax planning season by allowing them to more accurately estimate their tax liabilities for the upcoming year,” said George Farrah, Bloomberg Tax Editorial Director. “This process is especially important for 2019 because most of the changes under the 2017 tax act will be in effect. Taxpayers and their advisors should pay close attention to the impact of inflation adjustments determined using the chained CPI index on income tax bracket thresholds and other tax amounts.”
The Internal Revenue Service is expected to publish its official statement of 2019 inflation-adjusted amounts in a revenue procedure later this year.
Individual Income Tax Brackets
One of the most important changes under the 2017 tax act was a new income rate structure under which individuals are taxed. Lower tax rates will generally be applied to higher tax brackets. Before the 2017 tax act, there were seven rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The new law keeps the seven-rate structure, but applies the following rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates are effective for tax years beginning in 2018. But the lower rates are temporary. The pre-2018 rates will apply after December 31, 2025.
Bloomberg Tax has projected the 2019 income tax rate tables shown below. The tables for other filing situations are included in Bloomberg Tax’s full report.
Married Filing Jointly and Surviving Spouses
|
Pre-Tax Reform Rates (Before 2018 and After 2025) |
Tax Reform Rates (2018 to 2025) with 2019 Inflation-Adjusted Amounts |
|
10% – $0 to $19,050 |
10% – $0 to $19,400 |
|
15% – $19,051 to $77,400 |
12% – $19,401 to $78,950 |
|
25% – $77,401 to $156,150 |
22% – $78,951 to $168,400 |
|
28% – $156,151 to $237,950 |
24% – $168,401 to $321,450 |
|
33% – $237,951 to $424,950 |
32% – $321,451 to $408,200 |
|
35% – $424,951 to $480,050 |
35% – $408,201 to $612,350 |
|
39.6% – $480,051 or more |
37% – $612,351 or more |
Unmarried Individuals (other than Surviving Spouses and Heads of Households)
|
Pre-Tax Reform Rates (Before 2018 and After 2025) |
Tax Reform Rates (2018 to 2025) with 2019 Inflation-Adjusted Amounts |
|
10% – $0 to $9525 |
10% – $0 to $9,700 |
|
15% – $9,526 to $38,700 |
12% – $9,701 to $39,475 |
|
25% – $38,701 to $93,700 |
22% – $39,476 to $84,200 |
|
28% – $93,701 to $195,450 |
24% – $84,201 to $160,725 |
|
33% – $195,451to $424,950 |
32% – $160,726 to $204,100 |
|
35% – $424,951 to $426,700 |
35% – $204,101 to $510,300 |
|
39.6% – $426,701 or more |
37% – $510,301 or more |
Personal Exemption and Standard Deduction
The 2017 tax act suspends the deduction for personal exemptions for tax years beginning after December 31, 2017, and before January 1, 2026. Previously, most taxpayers were entitled to claim a personal exemption for each member of their household.
The standard deduction was significantly raised for all taxpayers for tax years beginning after December 31, 2017. When calculating their deductions, taxpayers may choose to take the higher of their itemized deductions or the standard deduction. The higher standard deduction means fewer taxpayers will itemize their deductions. The new standard deduction amounts will be adjusted for inflation for tax years beginning after December 31, 2018, and are scheduled to sunset December 31, 2025.
|
Filing Status |
Pre-Tax Reform Standard Deduction (Before 2018 and After 2025) |
Tax Reform Standard Deduction with 2019 Inflation-Adjusted Amounts |
|
Married Filing Jointly/Surviving Spouses |
$12,700 |
$24,400 |
|
Heads of Household |
$9,350 |
$18,350 |
|
All Other Taxpayers |
$6,350 |
$12,200 |
Alternative Minimum Tax (AMT)
The 2017 tax act temporarily raises the AMT exemption amounts for individuals. The AMT exemptions are projected for 2019 as shown below.
|
Filing Status |
Pre-Tax Reform AMT Exemption Amount (Before 2018 and After 2025) |
Tax Reform Exemption with 2019 Inflation- Adjusted Amount |
|
Married Filing Jointly/Surviving Spouses |
$86,100 |
$111,700 |
|
Unmarried Individuals (other than Surviving Spouses) |
$55,300 |
$71,700 |
|
Married Individuals Filing Separate Returns |
$43,050 |
$55,850 |
|
Estates and Trusts |
$24,600 |
$25,000 |