Taxes for seniors remain complicated topic
Published 12:09 am Wednesday, February 28, 2018
For an overwhelming majority of American seniors, the recent changes to the U.S. tax code should be good news. Still, taxes are a complicated topic, which means that for many retirees, the uncertainty surrounding the Tax Cuts and Job Act has increased their worry about how the changes will impact them this year.
To avoid any unnecessary financial surprises, seniors should begin thinking about how the new bill will affect them as they look at their 2017 return. They can take action to be more prepared and understand their return by setting up a time to review their 2017 return with a CPA to project what next year’s will look like.
There are still seven tax brackets, which now are set at 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent of your income (the old rates were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent). No changes were made to how much will be deducted for Social Security and Medicare.
According to experts, seniors and retirees should be reassured that for most people, this bill means positive changes in several ways. The new tax plan maintains the extra standard deduction for those who are 65 and older – an additional $1,300 deduction. According to the IRS website, “In general, the standard deduction is adjusted each year for inflation and varies according to your filing status, whether you’re 65 or older and/or blind, and whether another taxpayer can claim you as a dependent. The standard deduction isn’t available to certain taxpayers. You can’t take the standard deduction if you itemize your deductions.”
According to Leon LaBrecque, head of the Michigan Association of CPAs Special Task Force on Tax Reform, in Troy, Michigan, “Many seniors will benefit from the increased standard [deduction]. The additional deduction for seniors and blind [people] is retained, so seniors get larger standard deduction.”
This means that two married taxpayers who are both over 65 can reduce their taxable income by an extra $2,600.
For the next two years, all taxpayers can write off medical expenses that exceed 7.5 percent of their income – in the 2019 tax year it is set to revert back to 10 percent.
“Seniors who do itemize [deductions] will see a lower floor on medical deductions, which helps if they have long-term care expenses. Overall, most seniors should be better,” LaBrecque says.
With the new tax act, charitable donations are still deductible. However, donations made by IRA owners over the age of 70 1/2 will come directly off of their gross income.
Seniors can now contribute to a 529 plan – a tax-lessening plan designed to encourage saving for future college costs – for their grandchildren to be used not only for college but also for K-12, including private or religious schools. There is no immediate benefit to the donor, but the income is all tax-free, so the new law allows up to $10,000 a year to be withdrawn tax-free. Some states even allow income tax deductions for money contributed to the plan.
“Many of my clients like to contribute to their grandchildren’s education and this is expanded,” LeBrecque says.
With the new tax reform, “there will be winners and losers and the only way to know for sure (and see the tax bracket level) is to ‘run the numbers’ using tax software and a good tax-planning CPA,” says Scott Bishop, a member of the Financial Planning Association in Houston, Texas.
“Don’t let fear, anger or incorrect information lead you to believe that you will be worse off, know the law and plan appropriately,” Bishop says.
— By Cecilia Brown, CTW Features