Tax Overhaul: The Good, the Bad, and the Ugly for Seniors

Congress has ushered through the first major tax overhaul since Ronald Reagan was president. The measure, which President Trump signed into law last Friday, is about to change the lives of millions of Americans, including seniors. As the bill recently became a law, here is the good, the bad, and the ugly that seniors (and some not-so-senior folks) can expect:

Please note that many of these new laws will first be applied to 2018 taxes.

The Good

  • You can still deduct medical expenses. The deduction for medical expenses wasn’t cut. In fact, it’s been expanded for two years. In that time, filers can deduct medical expenses that add up to more than 7.5% of adjusted gross income. In the past, the threshold for most Americans was 10% of adjusted gross income. Under the new law, people whose unreimbursed medical expenses exceed 7.5 percent of their adjusted gross income can claim a deduction for those expenses in 2017 and 2018. Then, it is scheduled to revert to 10 percent for everyone in 2019.
  • Seniors can still take advantage of the additional standard deduction for filers over 65. The standard deduction will be doubled to $12,000 for single filers and $24,000 for joint filers who are married. The legislation leaves intact the additional standard deduction for filers who are 65 and over or blind, allowing them to claim an additional $1,300 when they file their 2018 taxes. This means that two married taxpayers who are both over 65 can lower their taxable income by an extra $2,600. Single filers who are blind or over 65 are eligible for a $1,600 additional standard deduction, on top of the $12,000 they get from the new tax law.
  • There are still seven tax brackets for individuals, but the rates have changed. Americans will continue to be placed in one of seven tax brackets based on their income. But the rates for some of these brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Find out where you fit here.
  • The child tax credit has been expanded. The child tax credit has doubled to $2,000 for children under 17. It’s also now available, in full, to more people. The entire credit can be claimed by single parents who make up to $200,000, and married couples who make up to $400,000.
  • There’s a new tax credit for non-child dependents, such as senior parents. Taxpayers may now claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.
  • If you’re a teacher, you can still deduct classroom supplies. The deduction for teachers who spend their own money on school supplies was left alone. Educators can continue to deduct up to $250 to offset what they spend on classroom materials.
  • The electric car tax credit lives on. Drivers of plug-in electric vehicles can still claim a credit of up to $7,500. Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number sometime next year.
  • Home sellers who turn a profit keep their tax break. Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains, so long as they’re selling their primary home and have lived there for two of the past five years.
  • 529 savings accounts can be used in new ways. In the past, funds invested in 529 savings accounts weren’t taxed — but could only be used for college expenses. Now, up to $10,000 can be distributed annually to cover the cost of sending a child to a “public, private or religious elementary or secondary school.” This change is a win for Education Secretary Betsy DeVos.
  • Have you gone back to school? You can still deduct student loan interest. The deduction for student loan interest, which is up to $2,500 per year, is safe.
  • Almost everyone is now exempt from the estate and gift tax. Before tax reform, few estates were subject to the federal gift and estate tax, which applies to the transfer of property during life and/or upon death. Now, even fewer people have to deal with it. The amount of money exempt from the tax — previously set at $5.49 million for individuals, and at $10.98 million for married couples — has been doubled.

The Bad

  • The personal exemption is gone: Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents, which lowered your taxable income. Not anymore. For many Americans, the elimination of the personal exemption will reduce or negate the tax relief they might otherwise get from other parts of the reform package.
  • The state and local tax deduction now has a cap: The state and local tax deduction, or SALT, remains in place for those who itemize their taxes — but now there’s a $10,000 cap. Previously, filers could deduct an unlimited amount for state and local property taxes, plus income or sales taxes.
  • The mortgage interest deduction has been lowered. Current homeowners are in the clear. Under the current law, homeowners can deduct the interest on a mortgage of up to $1,000,000 (half that amount for married taxpayers filing separately). Now, anyone who takes out a mortgage between December 15, 2017, and December 31, 2025, can only claim the interest deduction on a mortgage of up to $750,000 (half that amount for married taxpayers filing separately). For buyers in expensive markets, such as coastal regions, these changes might make home ownership less affordable.
  • The deduction for moving expenses is also gone. There may be some exceptions for members of the military. But most people will no longer be able to deduct the cost of their moving truck when they move for work. This will affect many seniors, who routinely downsize as they age.
  • Tax preparation deduction is also gone. Before tax reform passed, people could deduct the cost of having their taxes prepared by a professional, or the money they spent on tax prep software. That break has been eliminated.
  • The disaster deduction has changed. Losses sustained due to a fire, storm, shipwreck, or theft that aren’t covered by insurance used to be deductible, assuming they exceeded 10% of adjusted gross income. But now through 2025, people can only claim that deduction if they’ve been affected by an official national disaster. That would make someone whose house was destroyed by a California wildfire potentially eligible for some relief, while disqualifying the victim of a random house fire — such as the many house fires caused each year by people with Alzheimer’s or other types of cognitive impairment.
  • Adjustments for inflation will be slower. The new legislation uses “chained CPI” to measure inflation. It’s a slower measure than what was used before. Over time, that will raise more money for the federal government, but deductions, credits and exemptions will be worth less.
  • The individual mandate on health insurance has been scrapped. Republicans failed to repeal Obamacare earlier this year, but they managed to get rid of one of the health law’s key provisions with tax reform. The elimination of the individual mandate, which penalizes people who do not have health insurance, goes into effect in 2019. The Congressional Budget Office has predicted that as a result, 13 million fewer people will have insurance coverage by 2027, and premiums will go up by about 10% most years.

The Ugly

AARP takes issue with several of the new tax laws which could prove to be “ugly” for seniors. First, the law makes the individual tax benefits temporary. While many Americans are expected to pay less in taxes over the next eight years, those provisions are set to expire by the end of 2025. (The cut to the corporate tax rate, however, is permanent.)

AARP also expects the tax bill to drive up health care premiums and result in more uninsured Americans. That’s because the bill gets rid of the Affordable Care Act’s individual mandate. The severity of the impact of this measure is still up for debate among health policy experts.

As for Medicare and Medicaid, only time will tell. The tax bill doesn’t touch them directly, but the cuts are expected to add $1.46 trillion to the deficit over the next decade. That increase could trigger automatic spending cuts to entitlement programs, unless lawmakers vote to stop them. Medicare itself could see a $25 billion cut.

Even if Congress stops these automatic cuts, AARP indicates there’s still reason to worry about funding in the future. “The large increase in the deficit will inevitably lead to calls for greater spending cuts, which are likely to include dramatic cuts to Medicare, Medicaid, and other important programs serving older Americans,” Jo Ann Jenkins, AARP’s executive director said.

Medicaid Planning for Long-Term Care

As you can see, the laws that affect seniors are changing. Regardless of what happens with the tax law, the significant costs of long-term care can impact retirement plans, savings, and assets, and the level of care one receives. That’s why it’s so important that people speak with a financial advisor and an experienced elder law attorney about their long-term care preferences and put a plan in place. We provide both of these services right here at the Farr Law Firm.

Medicaid planning can be started while you are still able to make legal and financial decisions, or can be initiated by an adult child acting as agent under a properly-drafted Power of Attorney, even if you are already in a nursing home or receiving other long-term care. In general, the earlier someone plans for long-term care needs, the better. But it is never too late to begin your planning.

If you have not done Incapacity Planning, Estate Planning, or Long-Term Care Planning (or had your Planning documents reviewed in the past several years), or if you have a loved one who is nearing the need for long-term care or already receiving long-term care, please don’t hesitate to call us for a no-cost initial consultation:

Fairfax Elder Law: 703-691-1888
Fredericksburg Elder Law: 540-479-1435
Rockville Elder Law: 301-519-8041
DC Elder Law: 202-587-2797

Comments

  1. Evan,

    Hi. Thanks for the great summary. Need to add another big “Bad or Ugly”:

    “…says James Brockway, a tax expert who is of counsel at Withers Bergman in the New Haven, Conn., office. “You can also try to prepay investment management fees, since those are going away too in 2018.”

    https://www.washingtonpost.com/news/wonk/wp/2017/12/22/5-things-to-do-before-jan-1-to-lower-your-tax-bill/?utm_term=.67d26beeb454

    • Farr Law Firm says:

      Thanks so much for your comment and for reading our blog/newsletter. I agree that this certainly belongs in the “bad” or “ugly” section and will add it to the article. Thanks again and Happy New Year!

  2. Thanks for article. One issue: I do not see you mentioned higher deductions ($24000 per couple). This may offset the “lost” personal sections?
    Please clarify, and if appropriate, modify your article so seniors can make informed and appropriate planning.
    Thanks,
    Peter

  3. Farr Law Firm says:

    Hi Peter,
    Thanks so much for your comment and for reading our newsletter/blog. I did some research to answer your question, and found this article with additional details on the doubled standard deduction- http://www.businessinsider.com/trump-tax-plan-doubled-standard-deduction-2017-9
    Hope this is helpful. Thanks again and Happy New Year.

  4. Houston Carr says:

    I enjoyed the summary and the readers comments.

    Question: When new tax law was first introduced there was a lot of talk about simplification. Now that it is law, what is your take? Will the new law simplify filing and compliance?

    • Evan Farr says:

      Only time will tell. Whenever a new law is passed, it always makes things more complicated at first, because everyone is scrambling to understand the new law and the new regulations that get written based on the new law. Perhaps in the long run this law may simplify income tax filing because of the new standard deduction, but if history is any guide, this new law, like most, will continue to make things more complicated in the long run.

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