The Tax Cuts and Jobs Act – the sweeping tax reform measure signed into law by President Trump in late December 2017 – is good news for most retirees. The most significant benefit for most is the increase in the standard deduction, which nearly doubles in 2018 and beyond.
The new standard deduction goes from $6,350 to $12,000 for individual filers, from $9,350 to $18,000 for heads of households, and from $12,700 to $24,000 for married couples filing jointly.
What does this mean for retirees? An analysis by H&R Block, using a fictional single taxpayer with no dependents and a taxable income of $40,000, estimates that the Tax Cuts and Jobs Act reduces federal taxation from $5,739 in 2017 to $4,740 in 2018 – a reduction of $999 for the year.
However, a number of factors combine to affect the amount of tax any family saves under the law, and a few taxpayers – especially some in high-tax states – may actually see a net tax increase.
Here are some of the other major provisions of the new tax law:
Personal and dependent exemptions revoked
The new tax code removes personal exemptions that were worth $4,150 per person, including qualifying children and qualifying relatives. But, for taxpayers with no dependents other than themselves, the increase in the standard deduction more than makes up for it.
Furthermore, the new law allows a $500 credit for non-child dependents (other than a spouse).
Additionally, taxpayers aged 65 and older are still eligible for a deduction of $1,250, or $2,500 for married couples.
Section 529 benefits expanded
The law also allows Section 529 plans to be used for K-12 expenses, including home-schooling expenses. Previously, you could only use 529 plans for college and post-secondary educational expenses.
ACA individual mandate ‘penalty’ eliminated in 2019
The Affordable Care Act “penalty” for failure to maintain qualified health coverage is eliminated beginning in 2019. Unless you qualify for an exemption, or are already on Medicare, you will still face a penalty in 2017 and 2018.
Pass-through entity income deduction
For operators of sole proprietorships, LLCs and S corporations, you may be able to deduct up to 20% of income from these ‘pass-through’ entities. Some ‘professional services’ firms have phase-out limits on this provision.
SALT deductions and the AMT
The law caps state and local tax (SALT) deductions at $10,000 (or $5,000 for married people filing individually). This may hurt higher-income taxpayers in high-tax jurisdictions like New York, California and New Jersey.
However, the pain is mitigated by a major adjustment to alternative minimum tax (AMT) thresholds. The AMT exemption is increased substantially, from $54,300 to $73,000 for single filers, and from $84,500 to $109,400 for married couples.
The law also reduces the cap for home mortgage interest deductions from loans of $1 million down to $750,000. The measure only applies to loans taken out after December 15, 2017. Also, interest on home equity loans taken out after that date is no longer deductible. Previously, you could deduct interest on such loans up to $100,000.
Medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income (AGI) for 2017 and 2018. The threshold increases to 10% in 2019, however.
Caps on charitable contribution deductions are increased, from 50% of AGI to 60%.
Many miscellaneous itemized deductions are no more, including deductions for unreimbursed employment expenses, moving expenses (except for active military duty) and individual casualty and theft losses outside of federal disaster areas.
Tax preparation fees are no longer deductible. But many people will no longer itemize, reducing filing costs and simplifying taxes.