“The impact of the TCJA’s [Tax Cuts and Jobs Act] changes in the tax law could substantially reduce a retiree’s income tax liability . . . Each retiree’s tax situation is unique and requires careful consideration.” (US News)
Because this is the first year that 2017’s sweeping tax reform bill went into full effect, you’ll probably notice a few changes as you file your tax return.
First, if you’re 65 or older, or will turn 65 in 2019, you can use the 1040 SR, which is a simplified tax form created specifically for seniors who have “uncomplicated finances.” This form is said to be similar to the 1040EZ but is available to people ages 65 and up without the need for an income test for usage eligibility.
You can include multiple types of income on this form, as well, including “wages, salaries, tips, taxable scholarship or fellowship grants and unemployment compensation,” along with “Social Security benefits, and distributions from qualified retirement plans, annuities or similar deferred-payment arrangements. You may also include unlimited interest and dividends, as well as capital gains and losses.”
The catch? You can’t use this form until you file 2019 taxes in 2020.
Standard Tax Deduction Changes
According to AARP, you’re less likely to itemize deductions because the standard tax deduction nearly doubled. It’s now at $12,000 for single filers and $24,000 for married couples who file jointly. Plus, if you’re age 65 and up, you can add another $1,600 if a single filer, or another $1,300 if married, filing jointly. In fact, according to the Tax Policy Center, up to 90 percent of people may take the standard deduction. Before the tax reform, 70 percent of people did.
To figure out if you should itemize, add up charitable giving, along with mortgage interest paid. Add in state and local taxes—and, if this amount is less than the standard deduction, it will probably make sense to take the standard deduction. There is one big exception, though, and that’s if you’ve had high medical expenses. That’s because, for the 2018 tax year, you can deduct unreimbursed medical expenses that are greater than 7.5 percent of your adjusted gross income. In the future, this will go up to 10 percent.
Smaller Refunds, So Far
As of Feb. 1, the average refund is down by 8.4 percent when compared to last year’s. That equals an average of $170. And some people who got refunds in the past may find themselves owing this year. Reasons why include that personal exemptions have been eliminated; in past years, people could claim a personal exemption, plus for a spouse, and for each dependent. In 2017, each exemption could equal a $4,100 tax deduction with no limits on how many qualifying people could be claimed. So, larger families likely benefited more under the previous system.
Here’s another reason why refunds may be smaller (or you may need to pay this year): federal tax withholding tables (that determine how much is taken out of paychecks for taxes by employers) have been updated. Experts therefore say it makes sense to calculate your taxes as early as possible so you can have time to address any surprises.
Another AARP article notes that, even if you get a lower refund or have to pay when you normally get a refund, you may still be benefiting from the tax reform. That’s because it’s possible that you’re getting more money in your paycheck or pension during the year.
Additional Changes
Overall, some deductions have been eliminated, while there are changes to deductions with state and local taxes. Tax brackets have been adjusted, selling assets will affect your income, and more.
If you’re retired and are working as a consultant or freelancer, these earnings can be put into a Roth IRA past the age of 70.5. If you’re a caregiver, you may be able to get deductions. And, finally, when you take required minimum distributions from your retirement accounts, you may owe less than before in taxes on those dollars.
If you have questions about any of these changes (and note that this is NOT a comprehensive list), see a tax professional.
