Now that the new tax reform has been signed into law I thought I would approach the subject from the retiree’s point of view.
So what is the verdict?
Does the tax reform hurt or help retirees?
Let’s look at some of the key points of the reform and how they apply to retirees.
You can still deduct your mortgage interest from your taxes (up to $750,000). Remember that you can only deduct mortgage interest if you itemize your deductions on your tax return. Considering that the new tax law nearly doubles the standard deduction, the vast majority of you will not itemize your deductions. Even if you have a mortgage, many of you will no longer be able to deduct it from your taxes.
Medical expense deductions
You can now deduct any medical expenses over and above 7.5% of your income, which is a reduction from the previous 10%. Again, the standard deduction will make it unlikely you will itemize, so this deduction probably won’t help (unless you have huge medical bills).
Reduced tax rates
This is a biggie and it doesn’t only affect retirees. Here is the chart.
If you are currently in a 15% tax bracket or higher, your tax bill could be reduced by approximately 20%. This is great for retirees.
In the past you could deduct $4150 for yourself, $4150 for your spouse and $4150 for any dependents. The tax reform gets rid of personal exemptions. Losing this deduction could increase the tax bill for large families with kids (like me), but for retirees the loss of the personal exemption will be totally offset by the increased standard deduction.
Standard deduction changes
The standard deduction changes are a BIG DEAL for retirees and it is awesome news. If you are single, the deduction increases from $6,350 to $12,000. If you are married it increases from $12,700 to $24,000. Why is this such a big deal? Because most retirees have been using the standard deduction anyways. It means that you can automatically deduct $24,000 from your income. This is somewhat offset by the fact that you are losing the personal exemptions.
Example: This year, if you are filing jointly, you would get a $12,700 standard deduction and $4,150 for you and $4,150 for your spouse for the personal exemption. That totals $21,000.
In 2018, you would not get the $4,150 deduction for you and your spouse but you would get a $24,000 standard deduction. So for the vast majority of retirees, you would have to pay taxes on $3,000 less of income.
Most retirees will benefit from the new tax plan.
Overall most retirees are going to benefit from the latest tax reform. The lowering of marginal tax rates combined with a much higher standard deduction means you should be paying less taxes in 2018.