It’s Definitely Certain: Tax season 2019

Contributing Author: Christina Cho, PhD

DISCLAIMER: Filing taxes is not a simple task, especially for those who have dependents, own property, and/or are international postdocs. This article will provide some basic information—terminology, important dates, and new tax reforms—but this article is not providing advice and is not an exhaustive summary of taxation. For detailed information, please speak with a certified public accountant (CPA), an enrolled agent, or a tax lawyer. Alternatively, you can find more information on www.irs.gov, and www.efile.com.

Tax Season is upon us! Online services through IRS.gov, including free-filing, will be available. To help you navigate what can often be quite complicated, here’s a quick overview.

Important Dates:

January 28      Start of tax season
April 15            Deadline for filing taxes
October 15      Deadline for filing taxes with approved 6 month extension (IRS form 4868)*

*Even with an extension, you are required to make timely payments of any estimated tax liability by April 15. If you cannot pay everything by 4/15, it is still better to file on time to avoid a late filing penalty, which can be higher than the penalty for paying late.

 

Terminology without the jargon

One of the most confusing things about taxes is the terminology. Here are some important terms you must know in order to properly file your taxes.

 

  1. Gross Income: all of the income a person receives during the year that is not explicitly exempt from taxation.
    1. This is the starting point from which the IRS calculates an individual’s tax due, but it is NOT the same as wages. Wage earnings often do make up the majority of your gross income (>80%), but gross income incorporates any income (earned or unearned) not explicitly designated by the IRS as tax-exempt.
    2. Other sources of income include bonuses, commissions, royalties, gambling winnings, various investment returns (e.g. bond interest; capital gains or dividends from stocks), income from property rentals. Some withdrawals from retirement accounts (i.e. required minimum distributions, RMDs). Social security benefits or disability insurance income may also quality to be included in the calculation of gross income.

 

  1. Taxable Income: the amount of income that is actually subject to taxation, after all allowable deductions or exemptions have been subtracted from gross income.
    1. Also known as the adjusted gross income (AGI)

 

  1. Deductions: Certain expenses that can be subtracted from your taxable income. The tax system gives you a choice of adding up all of your deductible expenses (itemized)—and providing evidence of those expenses to the IRS upon request—or by simply deducting a flat amount (standard deduction).
    1. Personal exemption (for an individual, his/her spouse, and dependents): The Tax Cuts and Jobs Acteliminated the personal exemption from the tax code when it went into effect in 2018.
    2. Standard deduction: ensures that all taxpayers have at least some income that is not subject to federal income tax. Standard deductions generally increase each year due to inflation. You have the option of claiming the standard deduction or itemizing your deductions. However, you can never claim both in the same year.
    3. Itemizing: often reduces an individual’s tax liability (more complicated that the Standard Deduction, but you may save more money by itemizing. Please speak with an expert)
    4. You might consider itemizing if you made substantial charitable donations, or paid mortgage interest and property taxes on your home, or had large amounts of out-of-pocket medical expenses, or uninsured losses from a theft or casualty, such as a fire or natural disaster.

 

The Tax Cuts and Jobs Act, and what it means to you.

In addition to the potential delay of refunds, there are other changes to consider this tax season. On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act, a tax reform legislation that makes the following changes to your tax return (please note that this article only includes changes that the author believes will impact postdocs, for the complete list, please see references cited at the end of the article):

 

  1. Changes to the seven tax rates (see Table 1)
  2. Doubles the standard deduction
    1. Standard deduction amount is increased from $6350 to $12000 for single and Married Filing Separately filers, respectively. $12700 to $2400 for Married Filing Jointly and Widow Filers, respectively. $9350 to $1800 for heads of household.
  3. Eliminates the Personal Tax Exemption: The doubled standard deduction replaces the personal tax exemption (please see section on terminology)
  1. Eliminates Some Itemized Deductions Subject to the 2% AGI floor for Eight Years
  2. Decreases the Mortgage Loan Amount Limit for the Mortgage Interest Tax Deduction: For new loans starting in 2018, taxpayers can deduct their mortgage interest of a loan up to $750,000 ($375,000 for Married Filing Separately taxpayers). This is a decrease from the current loan amount of $1 million. It will go back to the original $1 million amount in 2026.
  3. Increases the Tax Deduction for Charitable Contributions: The limit for charitable cash donations to public charities and certain other organizations increases from 50% to 60% (except deductions combined with preferred seating at college sports events). The charitable standard mileage rate stays at 14% with no adjustment for inflation.
  4. Increases the Child Tax Credit: The Child Tax Credit is increased from $1,000 to $2,000 per child (first $1,400 is refundable). The credit will start to phase out at $400,000 and more than $200,000 for other taxpayers. This increased amount would phase out in eight years.
  5. Adds a New Tax Credit for Non-Child Dependents: There is a new $500 nonrefundable tax credit for non-child dependents/parents who are U.S. citizens. The credit can be applied to children over 17 years old, senior parents, or children with disabilities. The dependent’s Social Security Number (SSN) must be issued and provided to the IRS by the due date of a tax return in order to qualify for the credit.
  6. Reduces the State and Local Tax Deduction: State and local property taxes up to $10,000 can be deducted, in addition to income taxes or sales taxes.
  7. Decreases the Medical Tax Deduction Rate: The Medical Tax Deduction rate is decreased from 10% to 7.5% for 2017 and 2018 Tax Returns, regardless of age. It will rise back to 10% in 2019.
  8. Eliminates the Moving Expenses Deduction: You can no longer deduct moving expenses related to a new job (there are some exceptions for active duty military). These expenses include the use of a vehicle as part of a move. This will expire in 2025.
  9. Eliminates the Tax Deduction for Casualty and Theft Loss: All tax deductions for casualty and theft loss are eliminated (except for those losses attributable to a federal disaster as declared by the President) from 2018 to 2025.
  10. Eliminates the Tax Deduction for Tax Return Preparation Expenses
  11. Eliminates the Individual Health Care Tax Penalty: The tax penalty for not having health insurance will be eliminated in 2019. This means you would still be required to pay the penalty in 2018 (for 2017 Tax Returns) and 2019 (for 2018 Tax Returns), but not in 2020 (for 2019 Tax Returns).
  12. Eliminates Roth IRA Reconversion: If you converted your traditional IRA to a Roth IRA, you can no longer reconvert it back to an traditional IRA. Initial conversions from traditional Roth IRA are not affected.
  13. Eliminates Home Office Deduction for Employees

 

A note for International Postdocs

International postdocs are subject to U.S federal and state tax laws; however, qualified residents of some countries with tax treaties may be expect from U.S taxes. Treaties typically exempt the income of foreign researchers for a period of two years, but eligibility may be restricted (please visit www.irs.org for more eligibility). Recipients of scholarships, or other non-taxable incomes, still have to file a tax report even if they don’t pay income taxes.

Table 1. New tax rates for filing year 2019
Tax rate Single Married/joint & widow(er) Married/separate Head of household
10% $1 to $9,525 $1 to $19,050 $1 to $9,525 $1 to $13,600
12% $9,526 to $38,700 $19,051 to $77,400 $9,526 to $38,700 $13,601 to $51,800
22% $38,701 to $82,500 $77,401 to $165,000 $38,701 to $82,500 $51,801 to $82,500
24% $82,501 to $157,500 $165,001 to $315,000 $82,501 to $157,500 $82,501 to $157,500
32% $157,501 to $200,000 $315,001 to $400,000 $157,501 to $200,000 $157,500 to $200,000
35% $200,001 to $500,000 $400,001 to $600,000 $200,001 to $300,000 $200,001 to $500,000
37% over $500,000 over $600,000 over $300,000 over $500,000

 

 

 

References:

  1. irs.org
  2. Changes to tax law: https://www.wsj.com/articles/everything-you-need-to-know-about-the-new-tax-lawbefore-the-end-of-the-year-1541151030
  3. Status of tax refunds during shutdown:
    1. https://www.wsj.com/articles/in-a-shutdown-irs-will-take-your-money-but-give-no-refunds-11546462112
    2. https://www.washingtonpost.com/business/economy/hundreds-of-irs-employees-are-skipping-work-that-could-delay-tax-refunds/2019/01/22/1885e74e-1e7d-11e9-8e21-59a09ff1e2a1_story.html?noredirect=on&utm_term=.5846d197e7ff
  4. Income tax brackets: https://www.efile.com/income-tax-brackets/
  5. Information for International Postdocs: https://www.nationalpostdoc.org/page/TaxIssues#International
  6. Changes to tax returns: efile.com/tax-service/tax-calculator/2018-tax-calculator

 

 

 

 

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