Last month, President Trump signed into law a tax overhaul bill that divided many in Congress and around the nation. Supporters claimed that the new laws would ease financial burdens for the middle class while detractors claimed its intention was to help corporations and put the long-term burden on individuals.
Now that the dust has begun to settle, 55places.com dug into the laws and reactions in order to find out how it will affect retirees and active adults.
The good news is that, unless you’re in the small tax bracket of people who make between $191,650 and $416,700, your tax rate should go down in 2018. As always, it’s important for retirees to keep a close eye on any income to avoid slipping into a higher bracket and owing more taxes (that includes withdrawals from retirement accounts and required minimum distributions as well as any job income).
If you have a large retirement account balance, you may want to begin distributions by the time you turn 70-and-a-half, when you’re actually required to take distributions from some of those accounts. That way, it cuts down on a potential tax bracket jump. Another good reason to plan ahead now is that these provisions that bring the tax rates down are set to expire by the end of 2025. It’s likely that if all else remains the same, your taxes will rise then and you’ll want to be in an income bracket that you can afford.
The new tax bill tries to simplify the process by cutting down on deductions. Chances are, retirees won’t have too many to deal with anyway, other than property taxes, state taxes, and charitable contributions. Per Marketwatch, that third one could really come in handy for active adults.
By using Qualified Charitable Distributions, retirees would be allowed to donate directly to charities from their IRAs without having to itemize them after passing 70-and-a-half in age. By donating larger amounts less frequently, it would give you more to write off than if you were following standard deduction limits.
To Buy or Rent
There is a lot of concern that the new tax system will discourage active adults from buying and instead push them toward renting. Some experts believe that the savings from homeownership will be drastically undercut, by as much as $10,000 per year.
However, if this affects homebuyers, it also affects homebuilders. When in doubt, expect to see builders figure out ways to make homeownership work even in the face of lost affordability. That could mean changes in amenities, cost, or availability, but there’s no doubt that they will adjust to the market just as consumers must.
Good States & Bad States
The tax plan’s $10,000 cap on deductions for state and local income as well as state and property taxes could have a huge effect on where active adults decide to retire. As Kiplinger notes, high-tax states such as Minnesota, Connecticut, and Kansas are likely in trouble as retirees will eliminate them from their destinations. States with higher home prices, such as California, New York, and New Jersey, will also feel the impact.
Along with the sunshine, there’s another good reason so many people retire in Florida, Nevada, and Texas. That trio of states is among seven that have no individual income tax. Those looking to avoid sales tax instead should consider Alaska, Delaware, Montana, New Hampshire, or Oregon.
The tax plan doubles the estate tax exemption from $5.49 million to $11 million per person. Still, that’s worth keeping in mind if you plan to live in a state with an estate or inheritance tax (Illinois, Maryland, New Jersey, New York, Pennsylvania, to name a few). Want to steer clear of property taxes altogether? Consider retiring in Hawaii, Alabama, Louisiana, or Wyoming.
Perhaps the most important impact this tax plan could have on retirees is the way it affects medical coverage. Health care was a major focus on the tax bill and by repealing the Affordable Care Act’s individual mandate, which taxes those who choose not to have health insurance, it could effectively end the program.
What will happen remains to be seen, but it’s argued that it could result in a loss of affordable coverage and higher premiums for millions of Americans. That said, those dealing with high medical expenses were gifted with the ability to deduct expenses that exceed 7.5 percent of their adjusted gross income for 2017 and 2018 (though that threshold will go back to ten percent in 2019).
As for Medicare and Medicaid, the tax bill itself doesn’t involve them but further cuts are expected across both, adding up to the trillions. What it all means is that if medical expense concerns are important to you, as they are to most active adults, investing in more expensive medical coverage or socking away more savings will be important considerations.