What Seniors Need to Know About the New Tax Law Changes
Updated on Dec 09 2019
Now is the time to review the new Trump tax plan as the end of the year approaches as there are tax changes affecting retirees’ 2019 tax returns. Learn what seniors can expect from the recent tax bill changes and how tax returns and strategy might be different this year.
April 15 is the tax deadline for 2020. This day always comes quickly, so it’s important to stay familiar with the Trump Administration tax changes and how the changes might affect you. Learn the biggest changes seniors can expect in anticipation of Tax Day.
Tax Law Changes Overview
In June 2018, the Internal Revenue Service and U.S. Treasury Department released a draft copy of the new 1040 income tax form. Critics say that while the tax return is shorter, it may actually be more complicated, which is why Americans need to get informed.
According to the U.S. Congress’s Committee on Ways and Means, the primary tax-writing committee in the House of Representatives, the tax reform bill has a handful of explicit purposes, which include the following:
- Simplifying the tax process
- Preserving the mortgage interest deduction
- Eliminating Obamacare’s individual mandate penalty tax
- Increasing the standard deduction
- Providing more support to American families
- Providing relief for Americans with expensive medical bills
- Improving savings vehicles for education
Many of these changes may benefit the senior population, depending on unique financial needs.
How has the tax law act changed taxes for retirees?
Like any change, it takes time and education to learn about the tax changes. The tax reform might be good news for retirees as many of the changes could help them save tax dollars. There have been changes to tax brackets which might benefit many seniors, however certain key deductions have also been eliminated under the recent changes.
If you are a senior who wants to start thinking about taxes, here’s a glimpse of what’s in store for the new tax-filing season:
More retirees might claim the standard deduction
Itemizing on a tax return can make sense if you have a high level of deductions, so many seniors have historically itemized on their returns. However, with the new tax law, itemizing may no longer make sense for many seniors for two reasons:
The standard deduction used to be $6,350 for single tax filers and $12,700 for joing filers, but those numbers have practically doubled for the current tax year. Now, the standard deduction is $12,000 for single filers and $24,000 for those filing joint returns. This means that for itemization to make sense, your deductible expenses will need to exceed these figures.
In past years, you could deduct your state and local taxes no matter the threshold. With the new law, though, the SALT (state and local tax) deduction is now capped at $10,000 which means retirees with high state and property taxes may not have much to write off.
Keep in mind that the standard deduction may still make sense as the tax filing process might be easier and less costly, depending on your unique situation. An expert CPA or financial advisor can help you decide what may make the most sense for you.
Some retirees may opt to move
Since the new tax laws limits the SALT deduction to $10,000, seniors living in states with high property taxes, such as New York, New Jersey, and California, will lose out on some tax savings. 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 motivation to move to a more tax-friendly state.
Medical expenses might make a big difference
Healthcare is a big expense for retirees and under the new tax laws, you’re allowed to deduct medical expenses that exceed 7.5 percent 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, which could be enough to make itemizing worth it when it comes to taxes; especially since the average 65-year-old couple today is expected to spend $400,000 on medical costs in retirement.
Taxes on 401(k) or IRA withdrawals may be less painful
The new laws lowered tax rates for filers in almost every income category, which can be a big benefit for retirees; especially those subject to required minimum distributions (RMDs). You’re required to start taking withdrawals once you turn 70 and 1/2, when you hold funds in a traditional IRA or 401(k) as those withdrawals are taxed as ordinary income. However, with the new tax brackets being a bit more favorable across the board, retirees may not lose quite as much of their savings to taxes with their RMDs.
Get educated on the new tax laws
It is still early to predict how tax reform will ultimately impact the general public, but it’s clear that retirees will feel those changes, for better and for worse. If you’re retired, learn about the new laws so that you can make the most of your tax filing this year.
An expert CPA or financial advisor can help you strategize what may make the most sense for you under the new tax plan.
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