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The New Tax Law and Your Retirement
Like many reforms before it, the Tax Cuts and Jobs Act does little to simplify the tax code. It does, though, make some sweeping changes that will affect current and future retirees.
Some things persist. There are still seven tax brackets, but rates have lowered in most brackets by several percentage points. Brackets have also widened. All of this could change your investment strategies. Those with large balances in their retirement accounts may want to take distributions before the age of 70.5 when such distributions are mandatory. Although most corporate cuts are permanent, individual cuts are set to expire in 2025.
If you don't itemize, the new law's standard deduction has almost doubled to $12,000 for singles and $24,000 for married couples filing jointly. (Again, don't get too comfortable. The new standard expires in seven years).
For those who do itemize, the $10,000 cap on SALT (State and Local Tax) deductions can be disheartening, especially if you live in a state with high property taxes, high sales taxes, or a high personal income tax. The cap has goaded many into prepaying their 2018 property taxes - even though the IRS has warned a 2018 property tax deduction will not be allowed in 2017 if the 2018 taxes were not assessed in 2017. A better tactic may be moving to a state with low or no taxes.
Other deductions eliminated include moving costs (unless you're in the military), and costs related to tax preparation or money management. Losses for fires and floods are still deductible IF the event in which the loss occurred was declared by the president to be a disaster. Deductions for out-of-pocket medical expenses remain and are slightly more generous for the next two years. If these expenses are more than 7.5% percent of your adjusted gross income in 2017 and 2018, you may deduct them. By 2019, the expenses must be more than 10% of your AGI.
Personal exemptions are gone, but deductions for the blind and elderly stay. The Affordable Care Act's individual mandate, a tax penalty for those without health insurance, has been reduced to zero. This may prompt more instability in the markets and translate to higher premiums for those who need insurance most (seniors). Changes to estate taxes, charitable deductions, alimony payments, alternative minimum taxes, 529s, and the recharacterization of IRAs are other subjects worth researching.
The new law has a hefty price tag, likely adding $1.5 trillion to the national debt. Some want to counterbalance the cost by cutting "entitlement" programs - Medicaid, Medicare, and Social Security. A 2010 Medicare "pay-as-you-go" law could be triggered by the Tax Cuts and Jobs Act and could force a $25 billion cut to Medicare in 2018.
The Act also uses a "chained CPI" to determine how Social Security benefits are calculated. This new method allows inflation to rise more slowly and should allow billions in savings. It could also push some retirees into a higher tax bracket and lower benefits for others over time.
The new tax law is the most consequential tax legislation in three decades, and it will affect everyone in some way or another. There will also be unintended consequences, with fixes and adjustments needed down the road.
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