Last year, the U.S. tax code saw rampant changes after more than three decades. Taxpayers will face the consequence of the alterations this spring. The primary alteration has been the general lowering of tax rates. Retaining the tax brackets at seven, the rates have been lowered but the minimum tax rate has been maintained at 10%. Meanwhile, income thresholds, at which the corresponding tax rates are applied, have been raised.
Here’s a rundown of how the latest tax legislation will have an effect on retirees.
Standard Deduction Nearly Doubles
The federal standard deduction is a fixed monetary amount, which when subtracted from total income, reduces the taxpayer’s total payable amount. There is another concept called itemized deductionwhere tax payers list deductible categories and subtract the dollar value of each of them while paying taxes. Naturally, most taxpayers choose the one under which they can retain the greater amount of income.
The new tax law has almost doubled the amount of the standard deduction, where single filers can deduct $6,350 to $12,000 from their income and married joint filers can subtract $12,700 to $24,000.
For retirees, it is needless to mention that a large number of retired tax payers don’t carry a mortgage and have limited expenses to itemize. In such cases, opting for the standard deduction seems prudent. Also, the new tax law will continue to facilitate an additional standard deduction for filers over the age of 65. Single filers above 65 can claim an additional $1,600, while married filers over the age bar can claim an extra $2,600.
Retirees, who have deductible expenses greater than the higher standard deduction, should opt for itemizing. It should be kept in mind that in the past, filers (without any dependency claim) selecting the standard deduction could incorporate a personal exemption as well. But the new tax law doesn’t leave much scope for personal exemption.
Therefore, the higher standard deduction includes the amount of personal exemptions, and is thus not an effective doubling-up of the past standard deduction. It also means that retirees can achieve roughly the same overall deduction by taking the standard amount as they could by itemizing.
Healthcare Gets a Better Standing
Retirees who would like to choose itemized deduction will also get benefits in terms of healthcare expenses under the new tax law. Earlier, filers could itemize and deduct healthcare expenses totaling more than 10% of adjusted gross income (AGI), which has been cut to 7.5% now.
This will also help retirees with health savings accounts (HSAs) better combat high healthcare expenses.
Social Security Benefits Get Larger
Social security benefits, in the form of social insurance, prevent those in the lowest income bracket from retiring into relative poverty.
Since the new tax law has lowered the general tax brackets, the income from social security benefits will be taxed less.
The reduction in the standard deduction, on the first look, may seem far-fetched. But on a closer look, one can see that the elimination of personal exemptions can take a toll on people who have retired. Hence, once there is a clear sense of what your itemized deductions can total, you can make a stronger claim by choosing any method of deductions. Ideally, if the standard deduction comes to the same amount as itemized deductions, one should opt for the former and forego tax-preparation expenses.
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