Money Saving Tips
Tax Reform and Retirees
The Tax Cuts and Jobs Act that President Trump signed into law in late 2017 has several provisions that may affect retirees.
For many, the biggest impact will be where their income falls within the seven tax brackets. These income brackets determine the progressive level of taxation for money distributed from Social Security, pensions, employer-sponsored retirement plans, traditional IRAs and any earned wages. Starting with 2018 tax returns, the new tax rates will be 10, 12, 22, 24, 32, 35 and 37 percent.1 While those with a similar income from year to year may experience a lower tax rate, those with fluctuating income will want to keep a close eye on their income in case they tip over into a higher tax bracket.
Some retirees may find themselves in a higher tax bracket once they turn age 70 ½, which is when they are required to take minimum distributions from tax-deferred accounts such as a 401(k) or traditional IRA. One way to avoid this is to start taking distributions before age 70 in order to deplete high balances in those accounts and try to stay in a lower bracket throughout retirement.2 Note that withdrawals from tax-deferred accounts are subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10 percent federal additional tax.
The new bill almost doubles the standard deduction to $12,000 for single filers and to $24,000 for married taxpayers who file a joint return. In addition to this deduction, eligible taxpayers who are 65 and older or blind – and married — may claim an additional $1,300 when they file their 2018 taxes or $2,600 for a married couple who are both age 65 or older. Unmarried taxpayers who are age 65 and over or blind are eligible for an additional $1,600 deduction.3
For the 2017 and 2018 tax years, people with high out-of-pocket medical expenses may deduct the portion of those expenses that exceeds 7.5 percent of their adjusted gross income (AGI). Be aware, however, that in 2019 that threshold will become 10 percent.4
If you have questions about how tax reform could affect your retirement plan, give us a call. While we cannot provide tax advice, we can partner with tax professionals to help ensure your retirement assets are allocated and distributed as tax efficiently as possible.
1 Alessandra Malito. MarketWatch. Dec. 22, 2017. “5 ways the tax bill will affect your retirement.” https://www.marketwatch.com/story/5-ways-the-tax-bill-will-affect-your-retirement-2017-12-20. Accessed Dec. 31, 2017.
3 Darla Mercado. CNBC. Dec. 22, 2017. “The GOP tax overhaul kept this $1,300 tax break for seniors.” https://www.cnbc.com/2017/12/22/the-gop-tax-overhaul-kept-this-1300-tax-break-for-seniors.html. Accessed Dec. 31, 2017.
4 Michelle Andrews. Kaiser Health News. Dec. 22, 2017. “Bonus Tucked into GOP Tax Bill For Those Aiming To Deduct Medical Expenses.” https://khn.org/news/bonus-tucked-into-gop-tax-bill-for-those-aiming-to-deduct-medical-expenses/. Accessed Dec. 31, 2017.
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