Tax Reform for Self Employed Workers: 8 Things Changing for 2019
Last year, the current administration announced the biggest tax reform we’ve seen in the last thirty years: the Tax Cuts and Jobs Act (TCJA). This act puts into place new regulations that affect all types of people and businesses, including self-employed workers. Self-employed? Here’s how the TCJA may affect you.
Changes for 1099 Workers and Their Tax Returns
If you’re a 1099’er, here are some tax changes to keep in mind this year:
1. Increased standard deduction. The standard deduction is a fixed dollar amount that taxpayers can claim instead of itemizing their deductions (more on that soon). The TCJA raised this deduction amount, meaning you can lower your taxable income accordingly. Please note that the standard deduction amounts before the TCJA shown below are what they would have been for 2018 without the TCJA. These are not the 2017 amounts.
2. Changes to itemized deductions. If you opt not to take the standard deduction, you can apply itemized deductions to your taxable income instead. These deductions have changed (and some have even been eliminated) under the TCJA:
Charitable contributions: The limit on how many charitable contributions you can deduct has been increased from 50 percent to 60 percent of your adjusted gross income.
Medical expenses: You can now deduct unreimbursed medical expenses if they go over 7.5 percent (previously 10 percent and returning to 10 percent for your 2019 tax returns that you file next year) of your adjusted gross income.
State and local taxes: You may deduct state / local real estate, personal property, and either income or sales taxes up to $10,000.
Home mortgage interest: You may deduct your home mortgage interest on the first $750,000 of mortgage debt (previously $1 million) if you take your loan out after December 15, 2017.
Casualty losses: Previously, you could deduct the cost of damage, destruction, or loss of personal property from your taxable income. This deduction has been eliminated, but you can still claim deductions for certain losses in federally declared disaster areas (like areas experiencing earthquakes, hurricanes, or fires).
Moving expenses: You can no longer deduct job-related moving expenses, like packing, shipping, lodging, and fuel, from your taxable income.
3. New tax brackets. The income limits for all the tax brackets were adjusted, as well as the rates you are taxed at within each bracket. Most people will be taxed at a lower rate than before because the income limits for the tax brackets are broader and the rates are slightly lower.
4. New child / dependent tax credit rules. The Child Tax Credit (CTC), which has been around for over twenty years, offers a fixed amount of money per child under 17 (or qualified dependents) as a tax credit. New changes to this rule include:
You can now get a credit of up to $2,000 per eligible dependent, depending on your income.
The IRS will only refund the credit up to $1,400, and this is only if the credit reduces your tax liability to $0.
Taxpayers can qualify for the credit if their income is at least $2,500 (previously $3,000).
The credit is decreased for taxpayers with an income of $200,000 ($400,000 for joint filers), which is higher than the original $75,000 limit ($110,00 for joint filers).
A new “Other Dependent Credit” now pays $500 for any dependents who do not qualify for the Child Tax Credit (e.g. adult dependents, or children over 17).
5. New Form 1040. In order to accommodate these new changes, the Form 1040, which is used to file your annual income tax return, looks different from past years. It’s a bit shorter because it no longer includes the items that the TCJA eliminated. You may need to fill out additional forms for things like non-wage income (like business income) or deductions (like the self-employed health insurance deduction). The good news? If you file online or with a tax preparer, you won’t notice this difference!
6. No more personal and dependent exemptions. Before the TCJA, taxpayers got basic, flat-rate deductions of $4,050 per person just for paying their taxes. These exemptions could be claimed for themselves, their spouse, and any of their dependents. You can no longer claim these deductions, but other new changes may help you earn those savings back.
7. No ACA tax penalty. Since 2014, taxpayers have been fined for not having health insurance under the Affordable Care Act. This mandate has been repealed, so you will no longer be penalized if you choose to go uninsured.
8. No more alimony deductions. For several decades, taxpayers have been able to deduct alimony payments (court-ordered payments a spouse makes to his/her divorcee) from their taxable income; alimony recipients reported the payments as income. The TCJA changed these rules for alimony agreements made after December 31, 2018; now, neither the payer or recipient can deduct or report alimony.
Do you have questions about your self-employed taxes? Send them our way at specific email@example.com.