Tax Day is around the corner and time is of the essence when it comes to preparing your 2018 tax return.
See what retirees can expect from the new tax law changes and how your tax return strategy may be different this year.
How the New Tax Law Affects Seniors
In late 2017, Congress passed a massive tax overhaul to take effect for 2018 taxes and while change brings uncertainty, the good news is that seniors may benefit from the new Trump tax plan.
If you are a caregiver for a parent or senior loved one whose finances you manage or a senior yourself, here are some of the biggest changes to expect this tax season:
1. Higher standard deduction.
Many seniors have fewer expenses to itemize, if any, as they don’t have dependents or a mortgage. In this situation, families choose the standard deduction. The new tax plan doubles the standard deduction, meaning the majority of retirees will greatly benefit as the standard deduction is more valuable.
Also, the standard deduction is generally easier and less costly if you’re getting your taxes professionally done, depending on your family’s unique situation. An expert certified public accountant (CPA) or financial advisor can help you decide what may make the most sense for you.
2. Increased deduction for medical expenses.
Healthcare is a big expense for retirees and under the new tax laws, you’re allowed to deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). This means if your AGI is $60,000 and you spend $16,000 of it on healthcare, you’ll have an $11,500 deduction on your hands, which could be enough to make itemizing worth it when it comes to taxes.
When the average 65-year-old couple today is expected to spend $400,000 on medical costs in retirement, this can be substantial savings.
3. IRA charitable distribution as law.
The new laws lowered tax rates for filers in almost every income category, which can be a big benefit for seniors and their families – especially those subject to required minimum distributions (RMDs). You’re required to start taking withdrawals once you turn 70 and 1/2, when you hold funds in a traditional IRA or 401k as those withdrawals are taxed as ordinary income.
However, with the new tax brackets being a bit more favorable across the board, retirees may not lose quite as much of their savings to taxes with their RMDs.
4. Lower income tax rates.
Social Security benefits are a key source of income for many retirees and for many, a portion of this income is taxable. The new tax rules lowered most of the marginal income tax rates so that more income is included in the lower tax brackets. This means many seniors can benefit from a lower taxable income.
For example, the 15% tax rate dropped to 12% and the 25% tax rate dropped to 22%. It’s important to note that the new Trump tax plan did not change the amount of Social Security included in taxable income.
Don’t wait until the last minute to file your, a parent’s or senior loved one’s taxes. Filing early can help give you peace of mind and time to make sure you are informed about the new tax laws.
An expert CPA or financial advisor can help you strategize what makes the most sense for your family under the new tax plan.
Reprinted from A Place for Mom