Are you better off from the Tax Cut Act? Not so fast!

By Regan Garey, CPA, DBA

At first glance, seniors may believe they are better off for taxes in 2018. But it may not be true for you. Given that taxes are complex and ‘no one size fits all,’ let’s explore the new Tax Cut Act.

The hype is that nearly everyone will benefit from the tax law changes but that has not been proven. For example, the standard deduction will be doubled starting in 2018. Fantastic, right? But… the personal exemptions will be phased out temporarily. Where will that leave you? Tough to say but odds are most are not better off regarding their tax liabilities. It depends a lot on family size and taxable income levels. 

As seen in the quote below, higher income households will benefit the most. 

According to the Tax Policy Center “In general, higher income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution. On average, in 2027 taxes would change little for lower- and middle-income groups and decrease for higher-income groups. Compared to current law, 5 percent of taxpayers would pay more tax in 2018, 9 percent in 2025, and 53 percent in 2027.” (http://www.taxpolicycenter.org/feature/analysis-tax-cuts-and-jobs-act)

Will this affect your state taxes as well?

Again, sweeping generalizations should be analyzed with a critical eye since individuals’ tax situations vary considerably. Even if there were two individuals with income, deductions and family that is 100% identical, if they live in different states, their overall tax bills will differ. This despite many states’ tax laws being strongly influenced by the Federal tax laws.  

 “States have piggybacked on the federal individual income tax code in various ways since the tax was introduced over a century ago. In fact, some states originally levied state income taxes simply as a percentage of a resident’s federal tax liability (Mason2013). North Dakota, Rhode Island, and Vermont used this calculation as recently as 2001 (Duncan 2005).” (State Policy Center)

Some states’ taxable income starting point comes from the federal adjusted gross income (AGI) whereas some use the federal taxable income. Today, most states connect to the federal code through their definitions of income. 

Seniors may be affected most significantly by the following aspects of the new law:

1. Medical Expenses Deduction. Currently, anyone who has high medical expenses can deduct the portion of those expenses that exceeds 10% of their income. The Tax Cuts and Jobs Act increases the deductible to expenses exceeding 7.5% of income for 2017 and 2018. (In the recent past, the 7.5% percent of income was the established percentage so this is a somewhat ‘return to normal’.)

2. Personal and Elderly Deductions. Currently, in addition to claiming a $4,050 personal exemption, people over 65 can also claim a $1,250 blind or elderly deduction. The Tax Cuts and Jobs Act maintains the blind and elderly deduction but eliminates the personal exemption and replaces it with a roughly doubled standard deduction. (as discussed above)

3. Other Itemized Deductions. There are now caps to deductions on state and local taxes as well as mortgage interest. If you live in a state with high state/local taxes, your federal tax may increase. If you have your mortgage fully paid (as do many seniors), you will not be penalized by this maximum/cap on mortgage interest deductions. (https://www.dailysignal.com/2017/12/21/in-updated-charts-what-8-seniors-tax-bills-will-be-with-tax-reform/)

4. Tax rates.  Individual tax brackets would be set at 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent, and would expire in 2025.(aarp.org). This could have a minimal effect on seniors’ tax liabilities since there are several more tax brackets and some of their income would be taxed at a lower rate. 

5. Alternative Minimum Tax (AMT). Individuals and couples will still be subject to this tax. For individuals, both the exemption amount and the exemption amount phase-out thresholds would be increased (aarp.org).

6. Estate tax. The plan would nearly double the amount of inherited wealth exempt from tax to about $10 million from a current $5.6 million. The increase would expire in 2026 (aarp.org). Again, wealthier taxpayers benefit significantly from this temporary change but many taxpayers are not affected by this change at all. 

This might be a good year to see a tax accountant, even if you typically do your own taxes. If you can’t afford one, check to see if you can get some assistance from the AARP VITA (volunteer income tax assistance) free tax service. Keep in mind that they can only assist with basic tax questions and returns. 

Per the IRS website, if you need more time, you can get an automatic six-month extension. The fastest and easiest way to get the extra time is through the Free File link on IRS.gov. In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic tax-filing extension on Form 4868.

This is a six month extension and you would have until Oct. 15 to file a return. To get the extension, taxpayers must estimate their tax liability on this form and should also pay any amount due.

About the author

Dr. Regan Garey, CPA, DBA, is a full professor at Lock Haven University, where she teaches accounting and other business courses. She is a CPA with experience in audit, tax and investment accounting. She is a published author on financial literacy as well as a consultant to small businesses and the HR community. Her innovative, student-centered pedagogical approach to teaching is reflected in her incorporating new teaching strategies and numerous aspects of technology into her classes. Her area of scholarly work centers on the global set of accounting rules – International Financial Reporting Standards. In 2016 and 2017, she was an invited guest lecturer for an international business program at DHBW University in Heidenheim, Germany.