Broad takeaways on how the law will affect seniors, plus drilldowns on individual situations such as gig economy workers
Older adults have heard everything from how wonderful the new Tax Cuts and Jobs Act (TCJA) is going to be for them, to headlines assuring them a trip to tax Armageddon. The answer depends on your own circumstances, but there are ramifications for older adults as a group. Several key provisions of the bill shed light on how seniors will be affected.
First, the positives:
- Tax Brackets are Mostly Lower. Seniors who have taxable income will still find seven tax brackets, but they are generally a couple of percentage points lower than before. Like most of the tax cuts for individuals, these expire at the end of 2025. Click here for more detail.
- Deductions Climb. The new standard deduction is $12,000, up from the current $6,350 for single filers. Married couples have a $24,000 deduction, previously $12,700. However, filers can no longer claim a personal exemption of $4,050. The effect is to reduce the number of people filing itemized deductions, since they must meet the higher limit.
Importantly, the new tax bill keeps the additional $1,600 deduction for single filers who are over 65 or blind. A married couple who both qualify earns a $2,600 deduction. - Deduction for Medical Expenses Stays. The bill retains the Medical Expense Deduction used by almost 5 million taxpayers age 65 and over with high health costs. In addition, it reduces the cutoff from 10 percent to 7.5 percent for the first two years, 2018 and 2019, and grants the 7.5 percent level retroactively to 2017 filers.
- Gig Economy Members Benefit. If you have a pass-through business such as a sole proprietorship or LLC, the standard income deduction is now 20 percent. This includes Uber drivers, dog sitters, freelancers, and the like. If you don’t already have a side business, now may be a good time to start one. But there are income limits, and the deduction ends after 2025. Check the calculators here to see if you’ll benefit. Businesses can also deduct the cost of appreciable assets purchased before 2023 in one year, instead of amortizing them.
- Lower Corporate Taxes Should Boost Stocks. The official corporate tax rate has permanently changed from 35 percent to 21 percent, and international corporations have a chance to bring back cash socked away overseas for an even lower amount. While some companies are doling out one-time bonuses to employees, a few are lifting starting wages. If you’re a senior thinking about becoming a greeter at Walmart, for example, you’ll now make $11 an hour.
Furthermore, older Americans with retirement accounts invested in the stock market may see their money compounding faster than before if the country’s GDP increases, and earnings follow suit. The tax bill was designed to juice up the third-longest bull market on record. Theoretically, dividends will increase, corporate buybacks will increase scarcity, and stocks will shoot higher.
Now, let’s take a look at the negative effects:
- Cuts Expire. Most tax cuts for individual filers expire in 2025 (although corporate cuts are permanent). If the cuts are extended in the future, the deficit will rise accordingly.
- Deductions Climb. The new standard deduction is $12,000, up from the current $6,350 for single filers. Married couples have a $24,000 deduction, previously $12,700. However, filers can no longer claim a personal exemption of $4,050. The effect is to reduce the number of people filing itemized deductions, since they must meet the higher limit.
Importantly, the new tax bill keeps the additional $1,600 deduction for single filers who are over 65 or blind. A married couple who both qualify earns a $2,600 deduction. - Federal Deficit Increases. The federal deficit is money the government must borrow (and pay interest on) to cover its debts. The nonpartisan scorekeeper Joint Committee on Taxation (JCT) estimates that even with increases in economic growth attributable to the tax law, the deficit will increase by $1.1 trillion. Republicans (who currently control Congress) have said that their plan to counteract deficit increases would include cutting programs to make up for it. Medicaid, Medicare, the Older Americans Act (OAA) and Social Security are all on the table. The budget outline passed last fall proposed $1 trillion in cuts to Medicaid and another $473 billion to Medicare, while $800 billion is to come out of non-defense discretionary programs such as the OAA.
- Cost of Health Insurance Rises.The bill eliminates the Affordable Care Act (ACA) individual mandate, which taxed filers (mostly young and healthy) without health insurance. If you are one of the approximately 3.3 million Americans aged 55-64 who gets their health care under the ACA, you’ll be paying premium hikes of about $1,000 per year. This provision is likely to cause 13 million Americans to lose their health insurance.
- Program Cuts Likely. Increased deficit and budget sequestration rules, known as PAYGO, mandate budget cuts if the deficit increases. The tax cuts are predicted to cause a deficit increase that would trigger $136 billion in program cuts next year, including $25 billion in Medicare.
- Tax Bracket Indexing Slows. Every year, the income level in each tax bracket is adjusted for inflation using the Consumer Price Index. The new law will squeeze about $130 billion more out of taxpayers over 10 years by changing how inflation is measured. By using a lower “chained” measurement, taxpayers (especially those in the lower brackets) will find themselves pushed into higher brackets more quickly. A 2013 study by the Tax Policy Center found taxpayers in the second income quintile (those making about $25,000 to $50,000) would see a tax increase of about 0.4 percent after 15 years. Those in the top 0.1 percent of income would see no effective increase at all.
Chained indexing may be more accurate than prior measurements, and it’s had bipartisan support in the past. However, it is a regressive tax that is now permanently in the code, and advocates for older adults speculate there is now a smoother path to use it for Social Security cost of living adjustments. - Charitable Tax Deductions in Jeopardy. Although the new law keeps charitable tax deductions, the higher per-person standard deduction of $12,000 reduces the number of itemizers who can deduct charitable contributions from 40.7 million to 9.4 million, according to the JCT, and it’s likely some of those $95.8 billion in contributions might fall.
In addition, the estate tax exemption is doubled under the new law, escalating from $5.5 million to $11 million per person. Whereas last year Jane Richperson would be incentivized to give away $2 million of her $7.5 million fortune in lieu of paying the government, she now can pass that money down to lucky heirs. This may impact private sponsorship of programs for seniors, such as the art gallery profiled in this month’s Coffee Break, that are fully or partly funded by wealthy donors.
Qualified Charitable Distributions (QCD) are still legal, and can be a way for those at least 70 and a half (who must take a Required Minimum Distribution) to distribute up to $100,000 to 501(c)(3) charities without taking a tax hit. The money must flow from an IRA account directly to the charitable organization. Instead of paying ten percent or more if you made the same gift from ordinary income, you can fund that charity completely tax-free. There are strict rules surrounding the donation; check here for specific information. - Beer, Wine, Liquor Cheaper. The new law snips taxes on beer, wine, and liquor. What’s wrong with that, you ask? The Brookings Institute found that reduced prices on alcohol correlate directly with increased purchases and a higher death toll.
Takeaways:
The Tax Cuts and Jobs Act reduces taxes by approximately $1,600 on average this year. But the biggest cuts go to households making between $308,000 and $733,000, an analysis by the Tax Policy Center found. Middle income households can expect an average $900 cut, while lower earners will see less. Older Americans looking for work should benefit from new jobs it’s hoped will be created from company tax savings.
High income households benefit primarily from five of the law’s changes. Wealthy households are the most likely to own stock, and thus reap greater market returns on their investments that corporate tax cuts are expected to generate. A more generous alternative minimum tax allows them to keep more of their earnings, and the 20 percent income deduction for pass-through businesses is most beneficial to larger entities. The decreased rate of the maximum tax bracket and doubling of the estate tax exemption only benefit high earners.
In fact, the top one percent of households will put a cool $50,000 or more into their pockets, while middle earners can pay for a couple months’ worth of groceries. And in 2025 when the individual tax cuts expire, it’s only the wealthy who will still benefit from the plan.
What does this mean for America’s seniors? The median income (half above and half below) from all sources for people age 65 and above was $35,107 in 2011. That amount is less than half the median income of Americans aged 45 to 64, an analysis of the 2011 U.S. Census Bureau data by Interest.com found. Nearly a quarter of older married couples and almost half of single seniors relied on social security for 90 percent or more of their income in 2017, according to the Social Security Administration.
These individuals pay little or nothing in income tax, so why are groups representing older adults, like the AARP, up in arms over the new law? First, they criticize the temporary nature of individual tax cuts. Second, the changing inflation index gets a thumbs-down. Third, there are worries that seniors in high-tax states will be hurt by capped deductions. But these pale in comparison to what may be the law’s greatest impacts on health insurance and government programs.
Advocates for seniors worry that future effects, potentially the most harmful to older adults, will be glossed over by relatively small paycheck increases this year. Their biggest concerns are changes to Medicare and Medicaid that could be triggered by the higher federal deficit, and the erosion of health care coverage and increased premiums resulting from the elimination of the individual mandate.
"The large increase in the deficit will inevitably lead to calls for greater spending cuts, which are likely to include dramatic cuts to Medicare, Medicaid, and other important programs serving older Americans," according to a letter sent by the AARP to Congress.
These cuts would all be hardest on the most vulnerable population of seniors who make do with social security and little else. Thus, the overarching effect of the new tax law is to transfer wealth from the poor to the affluent. Senior advocacy groups remain vigilant as the effects of the tax law unfold.
Sources
“What The GOP Tax Cut Will Mean For Older Adults,” Forbes.
“The GOP tax overhaul kept this $1,300 tax break for seniors,” CNBC.
“In Updated Charts, What 8 Seniors’ Tax Bills Will Be With Tax Reform,” The Daily Signal.
“Why AARP doesn't like the tax bill,” CNN Money.
“Straight Talk for Seniors®: The Final Tax Reform Bill,” NCOA.
“TaxVox: Campaigns, Proposals, and Reforms,” Tax Policy Center.
“The Big, Permanent Tax Increase Inside the Tax Cut Act,” Bloomberg.
“Trump's Tax Plan and How It Affects You,” The Balance.
“The GOP’s Tax Reform Is Great for Gig-Economy Workers,” National Review.
“Preliminary Details and Analysis of the Tax Cuts and Jobs Act,” Tax Foundation.
“Senior Income Statistics,” National Committee to Preserve Social Security & Medicare.
“Fact Sheet SOCIAL SECURITY,” The United States Social Security Administration.
Blog posting provided by Society of Certified Senior Advisors
www.csa.us
