Tax reform's good news for retirees

Getting the most out of your tax refund for retirement

Ever since Congress passed the massive tax overhaul late last year, analysts and tax experts have been frantically studying it to figure out what exactly it changed and whom those changes would affect. By now it's clear that the tax package has winner and losers. And one group that stands to gain appears to be retirees.

The 2017 tax law, effective this year, includes some new rules that could be particularly beneficial for America's seniors. Among them are the higher standard deduction, lower income tax rates and an expanded deduction for medical expenses. In addition, some of the provisions that helped retirees under prior tax rules remain unchanged. Here's a rundown of the rules that are especially important to retirees.

The most important change is the significantly higher standard deduction. A large percentage of older taxpayers don't carry a mortgage or have downsized their residence, and therefore have limited expenses to itemize. In prior years, many claimed the standard deduction because it was more valuable than their itemized deductions. And now, with the new tax lay doubling the standard deduction, this will be the case for even more retirees. 

Also, the additional standard deduction for filers over age 65 will still be available. In 2018, the standard deduction for single filers is now $12,000 and $24,000 for those married filing jointly. Single filers over 65 can claim an additional $1,600, and married filers over 65 can claim an extra $2,600.

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Retirees who do have deductible expenses that exceed the higher standard deduction will be able to claim more of their qualified medical expenses as an itemized deduction in 2018 than previously. While the new rules preserve the deduction for these expenses, they also lower the income threshold for which such expenses must exceed from 10 percent of adjusted gross income (AGI) to 7.5 percent. In 2019, the income threshold will revert to 10 percent, unless the Congress acts to extend it. 

Social Security benefits are an important source of income for many retirees, and for many a portion of this income is taxable. But the new tax rules lowered most of the marginal income tax rates. For example, the 15 percent tax rate dropped to 12 percent, and the 25 percent tax rate is now 22 percent. So with more income included in the lower tax brackets, many seniors' Social Security taxable income should be lower.  

The new rules didn't change the calculation of the amount of Social Security benefits included in taxable income. For example, under current rules, for an individual with modified AGI, or MAGI (the total of AGI, nontaxable interest and 50 percent of Social Security benefits) between $25,000 and $34,000, up to 50 percent of their Social Security income would be taxable. 

The MAGI range for couples filing jointly is $32,000 to $44,000. When MAGI exceeds these ranges, up to 85 percent of Social Security is taxable. When MAGI is below the lowest end of these ranges, no Social Security income is taxable.

Last, retirees 70½ and older are required to take minimum withdrawals from an IRA or retirement plan. The new tax law didn't change the existing rules that allow you to use pretax dollars in an IRA to make donations to a nonprofit, religious organization or other qualified charity. A $100,000 annual limit is among the restrictions for this benefit. The IRA charitable distribution was a temporary provision that became permanent with the new tax law.

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