December 19, 2017 — The imminent passage of the Republican tax bill makes us wonder how our audience – retirees and people about to retire – will be affected by it. We will attempt to answer that question here, recognizing that everyone’s situation is unique and might be affected differently. We are not tax experts, but have tried to digest various media reports to provide this overview.
The bill will have direct effects on retirees in 2018, as well as some possible indirect effects down the road. Let’s look at each of those in turn.
Direct effects on retirees
1. Lower tax payments. With the exception of the people described in #4 below, almost everyone will pay lower federal taxes in 2018 than they do now. However, those cuts will expire in 2025.
Effect: Good news for retirees who pay taxes, except in those who live in high tax states. Who wouldn’t want to pay lower taxes!
2. The standard deduction is now much higher, at $12,000 per person vs. the current $6500. This means that far fewer people will have enough deductions to itemize, and filing will be simplified. On the other hand the current personal deduction of $4500 has been eliminated, so the net effect in the increase in the standard exemption represents an increase of only $1,350.
Effect: Positive for most people who currently don’t have many deductions.
3. Medical deductions. The threshold has been lowered so that expenses in excess of 7.5% of income can now be deducted, an improvement from the current 10%. As an example, if a man had an adjusted gross income of $50,000, he could deduct total medical expenses over $3750 (7.5% of $50,000). But to do that he would have to have at least $8250 in other itemized deductions to go over the $12,000 standard deduction
Effect: Since older Americans often face crippling expenses for hospital and other types of medical care, this last minute change to the law is a very positive development.
4. State and local tax deductions. Retirees who live in high tax states like NJ, NY, CT, MA, and CA – and who have significant incomes and or property taxes – will now only be able to deduct up to $10,000 for property, income, and sales (combined). A last minute change now allows these taxes to be combined, before the deduction only applied to property taxes).
As Mark Zandi (Moody’s Analytics) put it in the New York Times: “No one gets creamed more than New Jersey from this tax bill.”
Effect: Retirees affected by this provision, and the states and cities they live in, are going to be hurt badly.
5. Estate taxes. If you are a very wealthy retiree your heirs just got richer. The exemption threshold for taxable estates has been moved from $5.6 million to $11.2 million.
Effect: Great if you are very wealthy.
1. Individual mandate. Starting in 2018 the penalty for not having health insurance is eliminated.
Effect: The effect on older people who are not yet on Medicare could be serious. Premiums will have to go up without healthier people in the insurance pool, and many people over 50 will not be able to afford insurance. States and localities will have to cover more uninsured people who get sick but don’t have insurance.
2. Medicare cuts. Under current “paygo” rules the $1.5 trillion the tax bill will add to the federal deficit requires automatic cuts in various federal budget items, unless Congress does something to stop that. According to the non-partisan Congressional Budget Office, Medicare would have to be cut by $25 billion next year.
Effect: Something will have to give in Medicare, which is not good for retirees.
3. Property values in high tax states. Many experts believe that property values in states in the Northeast could drop by 10% or more as a result of the reduced deductions for state and local taxes.
Effect: If you were considering moving out of one of the states to retire somewhere else, you just got another reason.
4. Cuts to Social Security and Medicare coming? Speaker Paul Ryan said on a talk radio show that “We’re going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit.”
Effect: Real reform to preserve the long term integrity of these programs would be great. But if Social Security and Medicare are cut without a solid plan, that is not good for retirees.
5. Inflation and interest rates. The projected increases in the federal deficit means the government will have to borrow more money, driving up interest rates and payments.
Effect: Most retirees don’t get new mortgages, so the effect on them is probably minor. If they own bonds or get interest payments it might be positive. A bigger deficit is not so great for our grandchildren though.
People are still trying to figure out exactly what is in this tax bill. Your situation is different from someone else’s, so to really know how the tax bill affects you you need to run some trial scenarios. Here are 3 calculators that can help you with that:
NY Times Calculator
This one from MarketWatch seems more sophisticated and offers more options.
For the moment we are going to permit Comments to this article, provided they are polite and don’t call anyone names. However we are limiting to 2 comments per person so we get to hear from a variety of people, and not get into endless rebuttals.