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Advice & More February 2018

How Some Key Elements of the Tax Reform Bill May Affect Seniors

By Teresa Ambord

Known as the Tax Cuts and Jobs Act (TCJA), it affects most everyone in various ways. Here are several parts of the final bill that will affect everyone who files tax returns, and some that will affect seniors more than most.

The long awaited, hotly debated tax reform bill finally passed and was signed into law on December 22. During the months of debate between the House and Senate versions of the bill, there was a lot of confusion about what was proposed, what was eliminated, and what made the final cut. The IRS even published the changes that were anticipated and relied upon, but are now changed.

Known as the Tax Cuts and Jobs Act (TCJA), it affects most everyone in various ways. Here are several parts of the final bill that will affect everyone who files tax returns, and some that will affect seniors more than most.


Personal and dependency exemptions and standard deductions.

Beginning in 2018 there is no such thing as a personal and dependency exemption, as these are eliminated. (In 2017 these exemptions were $4,050.) Standard deductions nearly doubled. They are:

  • $12,000 for singles (up from $6,350 in 2017)
  • $24, 000 for married couples (up from $12,700 in 2017)
  • $18,000 for heads of household (up from $9,350 in 2017)
    There is still an additional amount of standard deduction allowed for the blind and elderly.
    The amount of the additional deduction is expected to be:  
    – $1,300 individuals who are age 65 and over or blind (and married). So a married couple where both are at least 65 can claim an extra $2,600.
    – $1,600 for those who are age 65 and over or blind (and single).

The estate tax exemption

Previously you may have heard that the federal estate tax exemption would rise to $5.60 million, and the estate tax rate would remain at 40%. In fact, the estate tax rate did remain at 40%, but after the dust settled, the estate tax exemption rose to a whopping $11.2 million (this is the expected exemption, but still not finalized as it is based on inflation).

That’s great news for family farms and other businesses that are property- and equipment- rich but cash-poor. Critics say this benefits the wealthy, but, too often, these businesses are forced to sell everything, including the family home, just to pay the punishing death taxes, on already-taxed assets. And of course, when businesses are sold, jobs may be lost. A higher estate exemption protects those jobs and keeps the wheels of commerce running.

With all that said, if there’s a loser in the estate tax changes, it could be charities. Why? Because many people who use charitable contributions (including charitable trusts) to minimize the possibly of being hit with estate tax will not need to do that. Also, there’s a disincentive to itemize deductions (of which charitable donations is one), since the standard deduction nearly doubled. By some estimates, charitable donations could decline between $4.9 billion and $13.1 billion. Of course, most people donate to charities that touch their hearts, so let’s hope donations remain high.


Speaking of charities…

Some politicians warned that in the new tax bill, our ability to deduct charitable contributions would disappear or be limited. That didn’t happen. Instead, donations that were previously limited to 50% of your adjusted gross income (AGI) can now be made up to 60% of AGI.


Medical expense deduction

Here’s a good turn for many seniors who have high out-of-pocket medical expenses. Again, some fretted that the medical expense deduction was going away. But good news… it got better. You may know already that you can only take a deduction for the amount of medical expenses that exceed a certain percentage of your adjustable gross income (AGI). For decades that percentage was 7.5%, which is a high hurdle for many taxpayers. Then in 2013, it became an even higher hurdle, rising to 10% for younger taxpayers. And for 2017, it rose to 10% for all
taxpayers, regardless of age. Thanks to the TCJA, this deduction reverts back to 7.5% for all taxpayers for all of 2017 and 2018.


Alimony loses its tax effect

If you pay alimony (under a legal order) you know it is tax deductible. If you receive alimony, you know that you must claim that amount as taxable income. However, the rules are about to change and disappear. For divorce settlements that occur after 2018 (or for existing settlements that are substantially modified after January 1, 2018), those who pay alimony can no longer deduct the amounts paid, and those who receive alimony do not have to claim those amounts as taxable income.


State and local taxes

There’s a lot of talk about losing your ability to deduct state and local and property tax. To some extent that is true, if your state and local and property taxes combined exceed $10,000, which is the new limit ($5,000 if you are married and file separately). Previously you could deduct an unlimited amount of personal state and local income and property taxes, or state and local general sales taxes if that benefitted you more (the option to claim general sales tax is still available, subject to the $10,000 limit).


Don’t delay

There are many other changes in the TCJA that may affect you so talk it over with your CPA or tax preparer. Keep in mind, with all the changes rolling in, your advisors are going to be busier than ever this year. Call early to get an appointment so you can get your tax ducks in a row.


Teresa Ambord calls herself a recovering accountant and Enrolled Agent with the IRS. Now she writes full time from her home, surrounded by her small dog posse.

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