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Only a few months after the passage of the Tax Cuts and Jobs Act (TCJA), many of our clients, particularly older clients, are still trying to discern whether the new tax law will benefit them. What will the new tax law mean for seniors? If you are over sixty-five, here are some things you should know.
Standard Deduction Increased, Personal Exemptions Eliminated
One of the big changes in the TCJA is the increase to the standard deduction. The new tax law nearly doubles the standard deduction for single filers to $12,000, and for married couples filing jointly to $24,000. For many people, this could be an incentive to take the standard deduction rather than itemizing deductions. As a result, tax filing time could be considerably simplified for some people.
This increase in the standard deduction will not benefit you if you itemize deductions and continue to do so. And because the new law eliminates personal exemptions (the amount of income that is exempt from income tax), the benefit of the increased personal deduction is offset for those who do take it.
Additional Standard Deduction for Those Over 65 or Blind Preserved
The tax code prior to the TCJA provided for an additional standard deduction for individuals who are blind or over 65 years old. The new law preserves this deduction.
For married taxpayers filing jointly, this means taxable income is reduced by $2.600 assuming both are eligible for this additional deduction. For single taxpayers who are either over 65 or blind, the additional standard deduction is $1,600.
Deduction for Medical Expenses Remains
Nearly five million U.S. taxpayers over the age of 65 use the medical expense deduction. The deduction is available to those whose medical expenses exceed a certain percentage of their adjusted gross income (AGI). That percentage has been 10%. The TCJA keeps the medical expense deduction, and lowers the threshold to 7.5% for 2018 and 2019. Filers may also retroactively claim the deduction for 2017. The lowered threshold means that even more older Americans (and others with high health costs) will be able to take advantage of this deduction.
If, like many seniors, you have significant medical expenses and limited income, the medical expense deduction could be a boon. Even if you have not claimed it in the past, you should speak with your tax preparer to see if the new threshold makes you eligible.
Changes to Tax Brackets
After the TCJA, there are still seven tax brackets, but the top tax rate is now 37%, down from 39.6%.
After the TCJA, there are still seven tax brackets, but the top tax rate is now 37%, down from 39.6%.
Also, the brackets are expanded somewhat, particularly at the top end. Whereas prior to the TCJA, a single filer with income of $450,000 per year would have been in the top bracket paying a 39.6% tax rate, that person would now be in the second-highest bracket, with a rate of only 35%. Someone with income of $75,000 per year would drop from a 25% tax rate to a rate of 22%. Overall, tax brackets are lower, a plus for seniors with taxable income.
Income tax rates of trusts and estates have changed, too. Instead of having five brackets with a bottom rate of 15% and a top rate of 39.6%, there are now four brackets, with a bottom rate of 10% and a top rate of 37%.
Obamacare Individual Mandate Eliminated
The Affordable Care Act (ACA), also known as Obamacare, carried an individual mandate to purchase insurance, and a penalty for not doing so. This has been eliminated, and is expected to save the government money by decreasing government expenditures on Medicaid and insurance subsidies. Critics of the repeal of the individual mandate fear that repeal will lead to increased insurance premiums, which in turn would lead to a jump in the number of uninsured Americans and increase the deficit to a level that would trigger automatic cuts in spending to Medicaid and Medicare. As such, it is yet unclear how this change may impact seniors in the future.
Big Increase to Lifetime Exemption for Gifts and Estates
If your estate plan has been based on a desire to avoid estate tax, the new tax law offers good news. The estate tax exemption for an individual, previously $5,490,000, is now $11,200,000. This provision, like the new tax brackets and many other provisions in the TCJA, “sunsets” on December 31, 2025, after which time the exemption resets to pre-TCJA levels.
The effect of the increased exemption does not repeal the estate tax, but it means that even fewer people will be required to pay it—and the number who would currently be required to pay estate tax is already quite small. For those whose estate exceeds their exemption amounts, the amount in excess of the exemption will be taxed at 40%. Talk to your estate planning attorney to see if the changes in the law make reconfiguring your estate plan worthwhile.
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