How Does the New Tax Legislation Affect People Age 65 and Over?
Q: I’d like to do some tax planning before the end of the year. What can you tell me about the impact on people over the age of 65?
A: The new tax law makes significant changes, some of which may be valuable for older taxpayers. Here are a few of particular importance for retirees:
- Higher standard deductions. Since many older taxpayers don’t have a mortgage, and only limited deductions, the standard deduction is often more valuable than itemizing. The tax law roughly doubled the size of the standard deduction. For 2018 it will be $12,000 (individuals) and $24,000 for (married filing jointly). In addition to the standard deduction, tax filers over the age of 65 may claim an additional standard deduction. The new rules increase the additional standard deduction to $1,600 for individuals and to $2,600 married filing jointly. Because the law reduced tax rates, retired taxpayers may have less taxable income at lower tax rates for the 2018 tax year.
- Rules for the taxation of Social Security benefits remain unchanged, but tax rates are lower. From 50 to 85 percent of Social Security income can be subject to taxation depending on two income thresholds. For taxpayers with incomes between $25,000 and $34,000 (individual) or $32,000 and $44,000 (married filing jointly), up to 50 percent of Social Security benefits may be taxable. For individuals with incomes above $34,000 or married couples filing jointly with incomes above $44,000, up to 85 percent of benefits may be taxable. To quickly determine whether a portion of benefits is taxable, taxpayers should take their adjusted gross income, and add any nontaxable interest, plus one-half of Social Security income. If the amount is over the thresholds, then a portion of benefits are taxable.
- More generous deduction for medical expenses in 2018. The new tax law retains the deduction for medical expenses. For 2018, retirees age 65 and over will be able to deduct medical expenses that exceed 7.5 percent of adjusted gross income. In 2019 this deduction will become less generous, and taxpayers will only be able to deduct medical expenses that exceed 10 percent of adjusted gross income. Unless taxpayers have a very high amount of medical expenses, the new standard deduction may be the better choice for filing.
(Remember this column does not constitute legal or tax advice. Please consult tax advisors with your tax questions and for assistance in making decisions.)