Even though we're well into the new year, there's still a fair amount of trepidation surrounding tax reform and its ultimate impact. On the one hand, some Americans will do better now that tax brackets have been overhauled. On the other hand, some taxpayers might lose out now that certain key deductions have been eliminated under the recent changes.
But if there's one group that might truly prove to be a mixed bag as far as tax reform goes, it's retirees. Here are just a few ways seniors could wind up affected.
More retirees might claim the standard deduction
Itemizing on a tax return can make sense for retirees with a high level of deductions. Case in point: An estimated 30% of seniors enter retirement with mortgage debt, and those folks may be more likely to itemize since they can take the mortgage interest deduction. But in light of the recent changes, it may no longer make sense for you to itemize as a retiree, and for two key reasons.
First, whereas the standard deduction used to be $6,350 for single tax filers and $12,700 for joint filers, those numbers have virtually doubled for the current tax year. Now, the standard deduction stands at $12,000 for single filers and $24,000 for those filing joint returns. This means that for it to make sense to itemize, your deductible expenses will need to exceed these figures.
Furthermore, it used to be the case that you could deduct your state and local taxes no matter what threshold they reached. But now that the SALT (state and local tax) deduction is capped at $10,000, it means retirees with high state and property taxes may now have that much less to write off.
Of course, there's nothing with taking the standard deduction. If anything, it might make the tax filing process easier and less costly. Still, it's a change to be aware of.
Some retirees may opt to move
As I just mentioned, the new tax laws limit the SALT deduction to $10,000, and while that may not impact homeowners in less expensive parts of the country, those living in states with high property taxes (like New York, New Jersey, and California) will lose out on some tax savings across the board. If you're a retiree who's been on the fence about hanging onto a pricey home with high taxes, this major change might just serve as the impetus to move to a more tax-friendly state.
Medical expenses might make a big difference
If there's one expense that tends to universally go up for retirees, it's healthcare. In fact, the average healthy 65-year-old couple today is expected to spend $400,000 on medical costs in retirement. Over a 25-year period, that breaks down into $16,000 a year. And while that's certainly a lot of money to spend, it does spell some good news from a tax perspective. That's because under the new laws, you're allowed to deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). This means if your AGI is $60,000, and you spend $16,000 of it on healthcare, you'll have an $11,500 deduction on your hands. And that could be enough to make itemizing worth it.
Taxes on 401(k) or IRA withdrawals may be less painful
As alluded to above, the new laws lowered tax rates for filers in almost every income category. And that will no doubt benefit retirees, especially those subject to required minimum distributions (RMDs). Whenever you hold funds in a traditional IRA or 401(k), you're required to start taking withdrawals once you turn 70 and 1/2, and those withdrawals are taxed as ordinary income. But with today's tax brackets being a bit more favorable across the board, retirees on the hook for RMDs may not lose quite as much of their savings to taxes.
While it's still a bit early to say how tax reform will ultimately impact the public on a whole, it's clear that retirees will feel those changes, for better and for worse. If you're retired, it pays to read up on the new laws so you can plan around them if needed.