As another new year begins, so do new tax guidelines and limits, courtesy of the IRS, and the Social Security Administration. That means you may face new financial realities and paycheck planning requirements in the coming year.
Following several years of stagnation, the IRS has raised contribution limits for IRAs, 401(k)s, and more.
With changes for Social Security and from the IRS going into effect in January of 2019, now is the perfect time to take a nice long look at your budget and how it may be affected with these changes.
Not only do you need to explore the changes to your weekly paycheck, but also your budget picture. Taking these steps now can help you avoid any surprises in 2019 that could blow your budget.
Also note, that these changes will affect your paycheck beginning in January 2019, but have no impact on the taxes you file by April 15, 2019. Those tax filings will follow IRS guidelines for the previous year (2018).
These are some of the changes set to go into effect in January 2019 that may impact the amount of money you bring home each week.
Defined contribution plans: The limit on contributions to these types of plans (401k, 403b, etc.) has increased from $18,500 in 2018 to $19,000 in 2019.
Individual Retirement Accounts: IRA contribution limits have also increased after six long years stuck at $5,500 maximum yearly contribution to $6,000 maximum annual contribution combined for traditional and Roth IRAs. Contributors 50 years of age and older may still make “catch-up” contributions, but the limit on these remains unchanged at $1,000 beyond the standard limit.
Defined benefit plan limits: The annual benefit limitations for defined benefit plans has increased from $220,000 to $225,000.
Social Security: The costs of a Social Security benefit credit will increase by $40 in 2019 to $1,360 in dollars earned. Another Social Security change of note for 2019 is the increase in Social Security earnings test limits. That is the amount of money you can earn from employment without having a negative effect on your Social Security benefits. Earnings limits will increase from $1,420 per month and $17,040 per year in 2018 to $1,470 per month and $17,640 per year in 2019 for those who will reach full retirement age after 2019. For those who reach full retirement in 2019, the increase allows them to go from a maximum of $3,780 per month and $45,360 per year in 2018 to $3,910 per month and $46,920 per year in 2019.
Social Security taxes: Rates remain the same at 12.4 percent. This rate is evenly split between employers and employees, meaning that both pay 6.2 percent. In 2019, employees will pay Social Security taxes on up to $132,900 of their income, a fairly modest jump from 2018's $128,400. What does this mean? If you make $132,900 or more in 2019, you will pay a total of $8,239.80 this year in Social Security taxes. Double the amount to $16,479.60 if you are self-employed and have to pay the entire tax.
Social Security benefits: Those who receive Social Security benefits can expect a 2.8 percent cost of living adjustment in 2019 as well. Maximum Social Security benefits for 2019 have also expanded and will be $73 higher than in 2018.
Medicare tax: Medicare tax rates remains unchanged at 1.45 percent from 2018. Higher earners will continue to pay a higher rate as mandated by the federal Affordable Care Act. Under the Act, employers must withhold 0.9 percent of all employees' wages over $200,000, or $250,000 for married couples filing jointly.
Standard deductions: When it comes to standard deductions, the news is good for 2019 as well. These deductions nearly doubled in 2018, going from $12,700 in 2017 to $24,000 in 2018 for those who are married and filing jointly. In 2019, they are set to increase yet again to $24,400 for married couples filing jointly, a change of $400. For individuals and heads of households, the standard deductions will be $12,200 and $18,350, respectively. Heads of households will see a change of $350 and others will see an increase of $200.
Since many Americans find the standard deduction a more attractive and appealing option, this has the potential to be a significant change, though not as substantial as the change in 2018.
Flexible spending accounts: The maximum contribution limit for medical flexible spending accounts increased by $50 from the 2018 ceiling, making the 2019 limit $2,700.
Adoption credit: Adoption assistance credit limits have increased from $13,810 in 2018 to $14,080 in 2019. This amount may be excluded from employee’s gross income to help offset some of the expenses related to the adoption process. It is a change of $270.
Each year there are new changes to consider. Because the IRS is continually changing the tax code, it is always wise to take a fresh look at your budget with an eye on the changes your paycheck will experience as a result of all these changes. The better prepared you are to address these changes, the less profound their effect on your household will be. Use the information in this guide to plan for any possible shortfalls in your weekly paychecks for the upcoming year.
*This article does not provide tax advice. Please consult your tax advisor in regards to your own situation.