As most know, President Trump signed the “Tax Cuts and Jobs Act” (or Reconciliation Act or 2017 Tax Act) on December 22, 2017. Most of the provisions regarding tax reform for individuals are effective for only for years 2018 to 2025 (so that it could be passed by a simple majority in the Senate), whereas the business tax reform measures (such as changing the corporate tax rate to 21%) are generally permanent. Unless Congress acts before the end of the year 2025, the tax structure will revert back to the way it was in year 2017. Although there are numerous provisions that affect both seniors and those who are not, here are a few provisions that may be of interest to seniors and those who are disabled.
- Medical Expense Deduction. The medical expense deduction (which was originally going to be eliminated) not only survived, but was even increased by reducing the 10% threshold (deduction permitted to the extent medical expenses exceed adjusted gross income) to a 7.5% threshold for years 2017 and 2018. The medical expense deduction will be allowed if your medical expenses exceed 10% of adjusted gross income for years 2019 and thereafter. Usually, the older you are, the greater the chance for increased medical expenses. So, this revision is of great importance to many seniors.
- “Chained CPI Indexing”. Although many seniors have relatively fixed incomes and one would think that a “Chained CPI” (which is a different measure of inflation likely to result in more individual taxpayers in higher brackets over time) has little impact on seniors, it is anticipated that this type of indexing will be used for increases to Social Security income. This will likely result in less Social Security income for seniors. The “Chained CPI” will also be used for increases for several transfer tax issues such as the annual gift tax exclusion (presently $15,000 per year, per done) and estate tax exclusion (estimated at $11.18 million for individuals who die in year 2018)
- Estate Gift and Tax Exemption Amounts. The federal and gift tax exemption was originally scheduled to be $5.6 million for a single (double that amount for a married couple due to portability, etc.). These amounts have almost been doubled (it is anticipated that a single person when who dies in year 2018 can pass approximately $11.18 million without federal estate tax and double that amount to approximately $22.36 million for a married couple). As indicated above, this is not a permanent tax cut (expiring after year 2025). Some states (unlike Texas) have state estate, death or an inheritance tax in addition to the federal estate tax. Only a small minority of American taxpayers were subject to federal estate taxes – so this is probably more of a morality (some think it is immoral to pay a tax to die) issue than a tax issue.
- State and Local Income, Sales and Property Taxes Deduction. The deduction for state and local income, sales and property taxes for joint and unmarried filers is now limited to $10,000. This is not indexed. It is not applicable to taxes paid carrying on a trade or business or in connection with net income from rents and royalties. The $10,000 limitation may result in the creation of multiple trusts (different taxable entities) so that each trust could use its own limit. Although the law has some anti-abuse sections, there are no present regulations. Although this deduction applies to seniors and non-seniors alike, it may give an incentive to some to either sell their home or purchase a less expensive home. It may also be an incentive for those living in high tax states to move to states with no state income tax or lower property taxes. It may also result in some seniors deferring the payment of property taxes until death.
- 529 Plan Expansion. The new law expands the present law (which allows tax-free growth as a way to save for college costs) to permit distributions up to $10,000 per student to pay for expenses of private (including religious) and public, elementary and secondary school expenses including therapies for children with disabilities.
- ABLE Accounts. ABLE accounts, which are established so that some disabled individuals (must have been disabled prior to age 26) can have increased savings without losing public benefits such as Medicaid, have been expanded. The new law permits money from a 529 education plan to be transferred into an ABLE account subject to some limitations (the annual total contribution in year 2018 is $15,000.00). Of course, there are many other tax issues including increasing the standard deduction, elimination of the personal exemption, limitation of the home mortgage interest on a residence to $750,000 of debt and elimination of deductibility on home equity loans, etc. Therefore, taxpayers should see if their existing planning is impacted by the new law. It is anticipated that new planning opportunities may become available (see a recent example of how the new tax law affected the planning of a client in an article below).