Most of the changes included in the Tax Cuts and Jobs Act are already effective for 2018. These are mostly good news for seniors. Retirees will be less affected by the tax law changes than other Americans since the changes do not affect the way Social Security and investment income are taxed.However, changes that become effective in 2019 are likely to have more harmful effects and the non-tax implications of the law on the Medicare and Social Security benefits of seniors are more disturbing.
Many seniors are already benefiting slightly from the tax bill’s temporary doubling of the standard deduction and temporary lowing of tax rates even if they won’t recognize that impact until next tax filing season.
The new tax law’s most significant risk – the mortgage and tax deduction limitations for high-priced homeowners – will not impact many seniors. When we look closely at the people who are most adversely affected by the new law, we see that the damage is caused by the disallowance of local, state and real estate taxes in calculating the federal taxable income. So essentially those who pay high taxes are paying taxes twice on that income. A side note – for tax planning purposes – we need to make an adjustment to our thinking about tax planning for these folks since marginal tax rate has gone up significantly (federal plus local plus state) for that portion of their income.
We don’t get to deduct our tax preparation fees that go up each year as the tax law gets more and more complicated. The simplification gains of one tax form, the Schedule A, is offset by complications in many other aspects of tax compliance procedures. For example, the expansion of compliance checklists and the requirements for verification of photo IDs.
Also, we don’t get to deduct investment advisory fees and charitable donations, so we wonder if that will affect the habits of seniors who write checks for these items.
The deduction for medical expenses is improved for last year and this year only. This only affects a small portion of people with large out-of-pocket medical expenses. Indeed, it will make that deduction slightly more generous, at least for next year 7.5 percent of income for 2018.
The Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, says the average older adult will pay about $1,000 less in taxes. This analysis comes from an article by Rachel Greszler is a senior policy analyst in economics and entitlements at the conservative Heritage Foundation’s Center for Data Analysis. The AARP confirms that most seniors will see some benefit if they pay income taxes. However, millions of seniors pay no income tax and are impacted only by the non-tax impact of the new law. It is clear that the tax impact of the law is dependent on your income level:
Low Income seniors – Seniors making less than about $33,000 that comes primarily from Social Security already pay very little federal income tax. They will see almost no benefit from the new tax bill.
Middle-income seniors making between $33,000 and $56,000, would get an average tax cut of about $300.
High-income seniors will receive a large tax cut. The top one percent income earners, those making $430,000 or more, pay an average of $26,000 less in taxes. Additionally, wealthy seniors and their families benefit from the elimination of the estate tax up to $22 million.
Health insurance – The new law is expected to remove younger healthier people from the most expensive insurance plans and raise health insurance premiums by 90% for those who are not Medicaid or Medicare eligible. Consider that this is in addition to the overall effects of medical inflation. This single factor dwarfs the effects of the tax law for those affected. Until now, most people have been able to limit health care costs to less than 20% of gross household income over the long term. We don’t have reason for confidence that will be the case in the future. Anyone in their late 50s and early 60s should make this a core consideration in their financial planning.
Social Security – The tax law makes a change in the way Social Security benefit increases are calculated to lower the amount of inflation adjustments. Going forward, inflation will be a bigger concern to seniors than it is now. An even larger concern is the impact the tax law will have on future social security benefits. By eliminating much of the tax on social security benefits, the tax law hastens the social security benefits funding crisis. So while we may pay less tax now, we will get less benefit later.
Over the coming years Tax Cuts and Jobs Act could have a profound negative impact on seniors, not just in the amount of taxes they pay but also by reducing the benefits they receive.