You may recall that last year’s tax season was one for the history books, with the most sweeping overhaul of the tax code in recent memory going into effect. While this year doesn’t bring quite as many changes to freelance tax returns, it’s still important to be aware of what’s new. With barely eight weeks to go, now’s the time to take note of these changes that will impact your 2019 tax return:
An increase in the standard deduction.
Yes, the standard deduction doubled in 2018, and it is increasing again this year to account for inflation, making it much more likely that most people will be claiming it rather than itemizing their deductions.
Single filers can claim a standard deduction of $12,200, and married individuals filing jointly qualify for a standard deduction of $24,400. Individuals who qualify as head of household get a standard deduction of $18,350.
Since the standard deduction is expected to be more advantageous for approximately 90 percent of taxpayers than itemizing deductions (and most likely you, unless you have very high unreimbursed medical expenses), you may want to check with a tax professional if you do the math and still think you should itemize your deductions.
A reprieve on the threshold for medical expense deductions.
If you have a medical condition and you have high unreimbursed medical expenses, you may be better off itemizing them than claiming the standard deduction. Last year, if you had medical expenses equaling 7.5 percent or more of your income, you could itemize these expenses as deductions. Initially, the medical expense threshold for 2019 was supposed to increase to 10 percent, but at the last minute, the government decided to retain the lower threshold. In 2020, the threshold is expected to raise to 10 percent.
The penalty for not having health insurance is gone.
The 2019 tax year is the first one since the introduction of Obamacare in which the Affordable Care Act’s individual Shared Responsibility Payment, or individual mandate, no longer applies. This fee was collected by the IRS from taxpayers who could afford health insurance but who chose not to buy it.
However, if you are filing your taxes in the District of Columbia, Massachusetts, or New Jersey, you are not off the hook. These states have introduced a new individual health insurance mandate that requires you to have qualifying health coverage or pay a fee on your 2019 state taxes. In 2020, California and Vermont will have this mandate, and several other states are considering it as well.
If you live in a state that requires you to have health coverage and you don’t have coverage (or an exemption), you will likely be subject to a state tax fine.
Alimony payments are no longer a tax liability or a deduction.
If you finalized a divorce in 2018 or later and you pay alimony, you can no longer deduct these payments from your taxable income, because those who receive alimony no longer have to claim it as income. If your divorce happened before 2018, alimony is still considered a tax deduction and a source of taxable income unless explicitly stated in your decree that the new rules are reflected.
These tax provisions were extended for the 2019 tax year and can work in your favor:
· You can deduct the cost of private mortgage on your taxes.
· The $500 lifetime credit for making IRS-approved energy-efficient improvements to your home is still in effect.
· If you experienced a home foreclosure and your debt was canceled, you do not have to claim it on your return. Last year, this was not the case, so if you did pay tax on this kind of canceled debt, you can file an amendment.
Bitcoin and other cryptocurrency transactions are being scrutinized by the IRS.
The IRS is paying more attention to digital currencies and views them as property rather than currency, which means for tax purposes it is treated the same as if you are trading stock. This year, if you are active in the digital currency markets, you will need to report your activities on a separate form: Schedule 1, “Additional Income and Adjustments to Income.” This applies to any taxpayer who has received, sold, sent, exchanged, or otherwise acquired any cryptocurrency.
Since the IRS is scrutinizing these transactions more closely for potential criminal activity or tax evasion, if you trade cryptocurrency, be sure to keep detailed records of all of your transactions in case of an audit and to make completing the Schedule 1 form easier.
These are the key changes that you’ll notice when completing your 2019 freelance taxes. While they may not be as extensive as the introduction of tax reform in 2018, they are likely to impact at least a few areas of your tax situation. If you are in doubt about how these changes apply to you, reach out to a tax professional—and don’t delay, because prime filing season is here!
Jonathan Medows is a New York City–based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union* and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
*Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation, you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.