Parenting · Taxes

Taxes – 2019 Edition

[As with anything tax-related, see my disclaimers.]

Every year I learn something new when I complete my taxes. This year was no different.

A Seventeen Year-Old Is Not a Child

Fountain in the Alhambra

The first thing I found out this year was that my oldest, who turned seventeen in 2019, no longer qualifies for the Child Tax Credit. I had thought I had until the 2020 tax year when she turns 18, but sadly no. My child tax credit was $1,500 less than I expected.

Why not a loss of the full $2,000 credit? She is still my dependent even if she doesn’t qualify for the child credit, so I get $500 for taking care of her throughout 2019.

I expected this credit to disappear eventually, but I didn’t expect to lose it in 2019.

199A Dividends and Qualified Business Income

The next thing learned is what a 199A dividend is. In the 2017 Tax Cuts and Jobs Act, special dividends related to certain types of investments can yield a 20% deduction.

Apparently, two of the total stock market index fund ETFs that I held during the year, VTI and ITOT, generated a total of $8 of 199A dividends. These dividends translated into a $2 deduction, or 44 cents of tax. Pretty much worthless, but something I experienced from the tax law changes.

Credit for Prior Year Minimum Tax

In 2019 I was finally able to recapture a credit for prior year minimum tax that I’d picked up in previous tax years. In 2017, I exercised some ISOs but didn’t sell them by December 31st and ended up owing some AMT for 2017. Even though I hadn’t sold the shares and hadn’t realized any gain or loss, Uncle Sam still recognized it as taxable.

In 2018, I didn’t pay any AMT and the AMT I’d paid previously in 2017 on the ISOs turned into a credit. However, I didn’t qualify for the credit in 2018 and the credit got pushed into 2019. As part of my 2019 taxes, I was able to recapture a little over half of the credit, or around $2k. The rest of the credit is kicked down the road to another future tax season. I suspect that if I hadn’t itemized this year and instead took the standard deduction that I probably would have seen the whole credit shift into my 2020 taxes.

This credit is a little bit of a nuisance credit, requiring two additional forms be filed, forms 6251 and 8801. These forms must be filed each year to keep the credit alive for future usage.

Child Tax

Returns

Bolsas de piel in Granada.

I had two children who completed tax returns for 2019. Both had W-2 income below the filing threshold but we filed so they could make Roth IRA contributions. To qualify for the Roth, they needed to file a return to prove they had income that justified the contributions.

What I learned is how the standard deduction works for a dependent. Instead of blindly taking the standard deduction, the dependent must instead calculate their standard deduction. Through the worksheets, I found that their standard deduction ended up being the minimum of either the normal standard deduction of $12.2k, or their W-2 income plus $350. They didn’t make more than $350 in passive income, nor did they exceed the $12.2k of W-2 income and passive income, so they paid no taxes in 2019.

We actually anticipated that they’d owe no taxes last spring when they filled out their W-4’s so they’d been exempt all year long. We filed only because of their Roth contributions.

My seventeen year-old was able to file online using the free fillable forms. Her income probably would have qualified her to use Turbotax for free, but it was a good exercise to walk her through a non-dumbed down wizard experience.

My fifteen year-old was relegated to filing her taxes via snail mail. Why? Apparently the IRS requires first time filers under the age of 16 to file via snail mail. I’d ran into this previously with her older sister so I wasn’t surprised.

Anything you learned during the 2019 tax season? Leave me a comment.

Hasta luego!

4 thoughts on “Taxes – 2019 Edition

  1. Thanks for sharing. This year, I too learned about 199A Dividends and Qualified Business Income.

    Thanks for teaching me how the child standard deduction works. My 13 year old is planning on working this year so it’s good to understand how that process will work. It seems simple enough given how you explained it.

  2. Hi David,

    I actually stumbled across the Qualified Business Income Deduction in 2019 as well when I was tracking how my medical office building portfolio was being taxed. It basically took my tax rate from 22% (where I thought I was) to 18% on my 199A dividends. I am thinking there might be a strategy here when parleyed with non-dividend distribution timing, but still thinking it over. A better strategy would be for Mrs. Max OOP to give up teaching part-time and make some real money : )

    But it certainly convinced me to hold more of my REIT portfolio in my brokerage account.

    I guess the child tax credit is set up like that because you got credit for the year “0” – “16” for a total of 17 credits?

    Max

    1. I’d always heard that REIT holdings should be in tax advantaged account but now I’m curious about how the QBI changes that calculus. Sounds like you’ve had luck with your industry specific REIT. I’ll have to check it out instead of just holding VNQ.

      Yeah, I’m sure the child tax credit deal makes sense from that perspective. Kids don’t stop being expensive when they hit adulthood 🙂

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