For the 2018 income tax year, the fairly new Tax Cuts and Jobs Act (“Tax Act”) provides some important changes that will save seniors (or their accountants) money and aggravation while completing their 2018 income tax return.
New Tax Brackets. To begin, the Tax Act keeps the number of tax brackets at seven, but lowers five of those brackets from their prior rate. Seniors will likely save on their taxes as a result.
Medical Expense Deductions. For those who itemize their deductions, the medical expense threshold was previously placed at 10% of so-called Adjusted Gross Income which meant, for example, if your Adjusted Gross Income was $40,000 for the year you would have to have medical expenses of more than $4000 before receiving any deduction. Under the Tax Act, that rate has been adjusted down to 7.5% for 2018 which is good news for seniors for 2018, because in the above example medical expenses exceeding $3,000 will be deductible.
The Standard Deduction was doubled. The Tax Act doubled the standard deduction for those who don’t itemize their deductions. For married taxpayers it is now $24,000. For single taxpayers the deduction went from $6,350 to $12,000. Thus, if you are married you can take $24,000 off of your taxable income without needing to itemize each and every dollar of deduction. The higher standard deduction rates will clearly help some seniors and will also save the Internal Revenue Service time and money in having to verify every dollar of tax deduction taken against taxable income.
Additional Deduction for those 65 or Blind. The Act does not change the additional standard deduction for taxpayers who are 65 and over or blind. Age: If you are age 65 or older, you may increase your standard deduction by $1,600 if you file Single or Head of Household. If you are Married Filing Jointly and you OR your spouse is 65 or older, you may increase your standard deduction by $1,300. If BOTH you and your spouse are 65 or older, you may increase your standard deduction by $2,600. Blind: If you are legally blind, you may increase your standard deduction by $1,600 if filing single or Head-of-Household. If you are Married Filing Jointly and you OR your spouse is blind, you may increase your standard deduction by $1,300. You may increase your standard deduction by $2,600 if BOTH you and your spouse are blind.
For purposes of providing a balanced view, there is a negative side to the new Act which should be discussed.
Loss of Itemized Deduction for State Taxes. Seniors living in high-tax states such as New York may see an increase in income tax due to an erosion of itemized deductions for state taxes paid, such as real estate tax and state income tax. Under the new law the itemized deduction for payments of state income tax and real estate taxes is now limited to $10,000, which may be substantially less than what seniors are paying into the system.
Personal Exemptions. Beginning in 2018, the personal exemption that taxpayers were allowed to take for themselves and their dependents is no longer available. This fact, coupled with the limitation of a number of deductions, such as the itemized deduction for state taxes paid, may result in higher taxes for some seniors.
More Social Security may be taxed. It has been reported that approximately 56 percent of households receiving Social Security will pay about 6.7 percent of their benefit in taxes. While the Act might lower the amount of other income subject to tax, the Act did not change the income thresholds that result in Social Security from being taxed. Such thresholds remain at $25,000 for individuals and $32,000 for couples filing jointly. To roughly determine whether a portion of social security benefits will be taxable, taxpayers should take their Adjusted Gross Income and add any nontaxable interest, plus one-half of Social Security income. If the result is over the threshold ($25,000 for individuals, $32,000 for joint-filers) then a portion of Social Security benefits will be taxed.
Medicare may be affected. Because the Act will reduce a large amount of tax revenue available to Congress this may result in increased pressure to cut Medicare and Medicaid. Medicaid currently pays for approximately two-thirds of all nursing home costs. The revenue cuts under the Act will increase the pressure brought by rising healthcare costs which will likely result in the inability to sustain access to quality health care services.
Finally, there is tax help for seniors. There are tax preparation services available and no or low cost to seniors should help be needed. For example, the AARP Tax-Aide Program will provide assistance at no cost to low to moderate income taxpayers age 50 and older at thousands of locations across the United States. Also, the Volunteer Income Tax Assistance (VITA) Program offers free tax help for the elderly, persons with disabilities, limited-English speaking persons, and individuals who make $53,000 or less. For those who qualify, the IRS certified volunteers can assist with basic income tax return preparation and electronic filing.
In conclusion, seniors should be optimistic about filing their taxes in 2018 unless they have previously relied heavily on itemizing their deductions for state taxes paid. With the reduction in five out of the seven tax brackets and the doubling of the standard deduction many seniors will save taxes during 2018. The decrease in tax revenue generated, however, will have an adverse effect on public benefits such as Medicare and Medicaid and, as a result, seniors or their care-givers should give greater attention to accessing quality health care services.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
Mark A. Krohn, LL.M Taxation, CPA and a partner at J&G, is in charge of the Business Law Team and is also a member of the Trust & Estates Team. He can be reached by phone at our Walden, NY office at 866-303-9595 toll free or 845-764-9656 and by email.[/column_1] [/column]