As you get ready for taxes this spring, expect change. The Tax Cuts and Jobs Act, signed into law in 2017, brings adjustments for 2018 tax returns. Many of the law's provisions will affect retirees, and potentially for the better in some cases. "The impact of the TCJA's changes in the tax law could substantially reduce a retiree's income tax liability," says Mike Herzog, a tax attorney with Eckert Seamans Cherin & Mellott in Pittsburgh. To take the best approach, start early and discuss the changes with a tax professional. "Each retiree's tax situation is unique and requires careful consideration," Herzog says.
Here's what retirees need to know about tax changes for 2018 returns:
-- The standard deduction has increased.
-- Some deductions and exemptions are gone.
-- There are changes to state and local tax deductions.
-- Tax brackets have been adjusted.
-- Earned income can be saved.
-- There are new deduction rates for medical expenses.
-- Caregivers may have deductions.
-- You may experience a lower hit on 401(k) and IRA withdrawals.
-- Selling assets will impact income.
-- Donate to charity the right way.
Use the following guidelines to help you prepare your 2018 taxes.
The standard deduction has increased. The standard deduction has nearly doubled in size. Previously set at $6,350 for single tax filers and $12,700 for joint filers, it is now $12,000 for single filers and $24,000 for those filing jointly. Furthermore, if you are filing as a married couple, an additional $1,300 is added to the standard deduction for each person age 65 and older. If you are single and age 65 or older, an additional deduction of $1,600 can be made. "For older taxpayers who no longer carry a mortgage and have limited deductions, the standard deduction is often more valuable than itemized deductions," Herzog says.
Some deductions and exemptions are gone. In the past, those who used a standard deduction could also include a personal exemption if they were not a dependent. That personal exemption is no longer an option. "Deductions for interest on home mortgages have been reduced and interest from home equity loans eliminated," says Bob Harkson, chief financial planner at Phase 2 Wealth Advisors in Gig Harbor, Washington.
There are changes to state and local tax deductions. Under the new law, a taxpayer's state and local tax deduction is limited to $10,000. This includes both income and property taxes. "Retirees who live in states with high property taxes, such as California, New Jersey or New York, will be limited on the state tax deduction they will be permitted to take on their return," Herzog says. "Some retirees might find it beneficial to move to a more tax-friendly state that has lower property taxes in an effort to reduce their tax liabilities."
Tax brackets have been adjusted. The tax brackets for 2018 have been reduced: The 15 percent tax bracket is now 12 percent, the 25 percent bracket is now 22 percent and the 28 percent bracket is now 24 percent. "If you can, limit withdrawals from taxable sources to keep you from being pushed into a higher tax bracket," Harkson says.
Earned income can be saved. For retirees working as consultants or taking on freelance gigs, earnings can be placed in a Roth IRA to build tax-free savings. "Unlike traditional IRAs, you can continue to add money to Roth IRAs past age 70 1/2, as long as you have earned income and are under the income limits," says Yvonne Marsh, a financial planner at Marsh Wealth Management in Knoxville, Tennessee. The adjusted gross income limits are $135,000 for a single filer and $199,000 for those filing jointly. If you want to put some of your earnings from 2018 in a Roth IRA, you have until April 15, 2019, to do so. "As long as you earned $13,000 in 2018, you can contribute the maximum $6,500 for both you and your spouse," Marsh says.
[See: 7 New Taxes Retirees Face.]
There are new deduction rates for medical expenses. If you have high medical expenses, you may be able to deduct them. "For taxpayers who are ridden with medical expenses and go beyond the standard deduction, they can itemize their expenses as long as they have documentation," says Jai Kumar, marketing manager at Rapid Filing Services in New York. Previously, you could deduct unreimbursed medical expenses that exceed 10 percent of your AGI for medical expenses. Under the new law, you can deduct health care costs that exceed 7.5 percent of your AGI. However, keep in mind that the deduction threshold moves to 10 percent once again in 2019.
Caregivers may have deductions. If you are single and are caring for a family member, you may be able to file as the head of household. To do this, you will need to be paying more than half the amount needed to support the family member. "Then your standard deduction is $18,000 and $19,600 if you are over 65," Harkson says. When acting as a caregiver, talk to your tax advisor to see if the deduction applies to your situation.
You may experience lower hit on 401(k) and IRA withdrawals. If you take required minimum distributions from retirement accounts each year, the new law may reduce what you owe on the funds. "Retirees who are subject to required minimum distributions from certain retirement accounts, such as 401(k) plans and IRAs, will be taxed on these withdrawals at ordinary income rates," Herzog says. Even though the amount will be taxed, the more favorable tax brackets could reduce what you'll owe this year.
Selling assets will impact income. Large capital gains from the sale of highly appreciated stock or property could lead to higher taxes and medical expenses. "If you are in a higher income bracket, remember that having a lot of taxable income in one year will drive up your Medicare premiums," Harkson says. It might be advantageous to sell stocks or other property over a set period, such as several years, to stay in a lower income tax bracket.
Donate to charity the right way. If you filed a charitable giving deduction as an itemized deduction in the past but aren't itemizing this year due to the higher standard deduction, look for other ways to donate to charity. If you're over age 70 1/2 and have to take required minimum distributions, you can give these funds directly to charity. Have the custodian of your account make the transfer to the organization you want to help. By doing so, you'll avoid income taxes on the required minimum distributions. The maximum amount you can donate is $100,000.
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