Retirees, most of whom are on relatively fixed incomes, are probably the most concerned about what the new tax law will mean for them. But, generally, they will be less affected than others because the changes do not affect how Social Security and investment income are taxed. In fact, many will benefit from the doubling of the standard deduction and, with the new individual tax brackets and rates, will be paying less in taxes when they file their tax returns in April, 2019. (Most of the changes will apply to 2018 income, not 2017 income.)
Here are main provisions in the tax law that could particularly affect retirees and persons with disabilities. These individual provisions are set to expire at the end of 2025, so Congress will need to act before then if they are to continue.
- Individual Income Tax Rates and Brackets: There are still seven individual tax brackets and rates. The 10% and 35% brackets remain the same, but the rest are lower – 12%, 22%, 24%, 32% and 37%.
- Standard Deduction: The standard deduction is increased from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for married couples filing jointly.
- Blind and Elderly Exemptions: The new law eliminates personal exemptions. The additional standard deduction amount for the aged (over 65) or the blind is now $1,300 ($2,600 per married couple or $1,600 for an unmarried individual who is not a surviving spouse).
- Medical Expenses: People with high medical expenses can deduct the portion of those expenses that exceeds 7.5% (reduced from 10%) of their income. Note that this part of the new law applies to medical expenses for 2017 and 2018.
- State and Local Tax (SALT): The new law reduces the federal deduction that may be taken for the amount you pay in state and local property taxes, income and sales taxes to $10,000.
- Mortgage Interest Deduction: The new law lowers the amount of interest that you may deduct on a new mortgage on a first or second home from $1 million of debt to $750,000. (If you already have a mortgage, you would not be affected.) The new law also eliminates the deduction for interest on home equity loans.
- Credit for Non-Child Dependents: Parents will be able to take a $500 credit for each non-child dependent they are supporting, including a child age 17 or older, an ailing elderly parent or an adult child with a disability.
- Alternative Minimum Tax (AMT): The new tax law increases the current income exemption levels for individuals from $54,300 to $70,300 and for married couples from $84,500 to $109,400.
- Estate Tax Exemptions: The new law doubles the estate tax exemption to $11.2 million for individuals and $22.4 million for married couples. Amounts over these exemptions will be taxed at 40%.
- Health Insurance Mandate: The new law eliminates the financial penalty for not buying health insurance.
- ABLE Accounts: The new law allows money in a 529 education plan to be rolled over to a 529A ABLE account (accounts that allow individuals with disabilities to retain higher amounts of savings without losing their Social Security and Medicaid benefits); but rollovers may count toward the annual contribution limit for ABLE accounts ($15,000 in 2018).
What to Watch
Expect some clarifications and strategies as the experts weigh in. There will also undoubtedly be some adjustments as the new tax bill goes into effect. Please don’t hesitate to reach out to Terri Hilliard PC if you have questions about these new provisions and how they may impact you.