If there has been one common dialog over the past few months it has to be about the new Tax Law changes and how they will affect different people. I plan to write several blog posts and articles on this topic over the coming weeks and months to help everyone have a better understanding of how they might be affected by these changes.
This post is about how this affects seniors and people with disabilities. For example, I have talked about Sally and John in several past posts…I want to use them again since their situation is perfect for this topic. You might remember that Sally and John are 70 years old, retired, and on a fixed income. But there is one more interesting part to their story…their son Bill. He is their 50-year old son living with them who has disabilities. What prompted this post was a phone call I received from Sally the other day where she asked, “Can you please tell me how all these new tax law changes will impact both us as a retired couple and our son with disabilities?” Absolutely…and it was such a relevant topic I wanted to share it with everyone that might have an interest in this from being either a senior or from having a family member with disabilities.
To cut to the chase, we told Sally the new tax law was mostly good news for them. Like most seniors, Sally and John will be less affected than other taxpayers because the changes do not affect how Social Security and investment income are taxed. In fact, they will benefit from the doubling of the standard deduction and they will be paying less in taxes when they file their tax returns in April 2019, thanks primarily to the new individual tax brackets and rates.
There are 10 main provisions in the tax law that could particularly affect retirees and persons with disabilities. These individual provisions are set to expire at the end of 2025, so hopefully Congress will act before then so they can continue. Here are the 10 main provisions…
- (Mostly) Lower Individual Income Tax Rates and Brackets – While there are still seven individual tax brackets and rates, most are lower. Here are the new rates and how much income will apply to each:
Rate Individuals Married, filing jointly
10% Up to $9,525 Up to $19,050
12% $9,526 to $38,700 $19,051 to $77,400
22% $38,701 to $82,500 $77,401 to $165,000
24% $82,501 to $157,500 $165,001 to $315,000
32% $157,501 to $200,000 $315,001 to $400,000
35% $200,001 to $500,000 $400,001 to $600,000
37% $500,001 and over $600,001 and over
- Standard Deduction is Almost Doubled – For single people, the standard deduction is increased from $6,350 to $12,000. For married couples filing jointly, it increases from $12,700 to $24,000. Under the new law, fewer filers would choose to itemize, as the only reason to continue to itemize is if deductions exceed the standard deduction.
- Personal and Elderly Exemptions – The new law eliminates these personal exemptions, replacing them with the increased standard deduction. The blind and elderly deduction has been retained in the new law. People age 65 and over (or blind) can claim an additional $1,550 deduction if they file as single or head-of-household. Married couples filing jointly can claim $1,250 if one meets the requirement and $2,500 if both do.
- Medical Expenses Deduction – Under the current tax law, Sally and John could deduct a portion of their medical expenses that exceeds 10% of their income. The new law increases this to medical expenses that exceed 7.5% of income.
- State and Local Tax (SALT) Deduction – The amount Sally and John pay in state and local property taxes, income, and sales taxes can still be deducted from their Federal income taxes, but these deductions are limited to $10,000.
- Lower Cap on Mortgage Interest Deduction – Sally and John won’t be affected by the cap on their mortgage interest deduction because their house is paid off. For those who still have a mortgage, the new law puts the cap at $750,000 of debt. (If you already have a mortgage, you would not be affected.) The new law also eliminates the deduction for interest on home equity loans, which is currently allowed on loans up to $100,000.
- Temporary Credit for Non-Child Dependents – Bill, Sally and John’s disabled adult son, lives with them. Under the new law, Sally and John will be able to take a $500 credit for Bill because they are supporting him. The new law allows this credit for a child age 17 or older, an ailing elderly parent, or an adult child with a disability. It is temporary because it is set to expire at the end of 2025, along with the other individual provisions.
- Higher Exemptions for Alternative Minimum Tax (AMT) – The AMT was created almost 50 years ago to prevent the very rich from taking so many deductions that they paid no income taxes. It requires high-income earners to run their numbers twice (under regular tax rules and under the stricter AMT rules) and pay the higher amount in taxes. But because the AMT wasn’t tied to inflation, it has gradually been affecting a growing number of middle-class earners. The new tax law reduces the number of filers who would be affected by the AMT by increasing the current income exemption levels for individuals from $54,300 to $70,300 and for married couples from $84,500 to $109,400. At their current income level, Sally and John won’t have to worry about the AMT.
- Federal Estate Tax Exemptions Doubled – The new law does not repeal the Federal estate tax. However, it does eliminate it for almost everyone, including Sally and John, by doubling the estate tax exemption to $11.2 million for individuals and $22.4 million for married couples. Amounts over these exemptions will be taxed at 40%. The new rates are effective starting January 1, 2018 through December 31, 2025.
- Eliminates Individual Mandate to Buy Health Insurance – With the elimination of the individual mandate to purchase health insurance, there will no longer be a penalty for not buying insurance. This is expected to help offset the cost of the tax bill and save money by reducing the amount the federal government spends on insurance subsidies and Medicaid.
I hope this gives you a bit more clarity on how these laws might affect you in your particular situation, like they did for Sally and John. As with any tax law discussions, it is very important to speak with your personal tax advisor on these to see how they specifically might affect you in different ways, depending on your situation. If you ever need to Ask a Question or if you would like to arrange a meeting with us to discuss this in a little more detail, just let us know. We will also be doing a seminar on this topic in the next few months so stay tuned for more details on this as well.