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The New Tax Law and You

Here's how the 2018 tax overhaul will affect these 6 households

illustration of people, taxes, money and the U.S. capitol

Peter Horvath

We break down how different types of older taxpayers will be affected by the recent tax law changes.

The recently passed overhaul of the U.S. tax code is already affecting the way many companies do business. But how will the plan affect the income taxes of older Americans?

People who have studied the new law—which goes into effect starting with the 2018 tax year—say that most of us will pay less in taxes in the next few years, thanks to lower tax rates and higher standard deductions.

But the loss of some prized tax breaks and new caps on others like state and local taxes could result in higher tax bills in April 2019 for some older taxpayers, particularly those living in states with high tax rates. And over time, some of the benefits of the new tax bill will fade away; experts project that a majority of taxpayers will pay more within 10 years.

AARP asked H&R Block’s Tax Institute to analyze the 2018 impact of the new tax code on a cross section of hypothetical households. Here’s a look at how some older taxpayers fare under the old and new tax code, assuming similar income and expenditures each year.

Scenario 1: Wisconsin sweethearts

John, 67, and Susie, 63, who live in Madison, still have a mortgage on their home. He’s retired and pulls in $17,000 from Social Security; she still works, earning $50,000 a year. Both are relatively healthy, and Medicare and her work insurance cover most of their medical bills. In 2017 they claimed $13,000 in itemized deductions:

  • $5,000 in real and personal property taxes
  • $5,000 in mortgage interest
  • $2,000 in state and local income taxes
  • $1,000 in charitable donations

2018 result: Federal taxes will go down by $1,114.

What changes:

  • Higher standard deductions eliminate their need to itemize. The couple have a new standard deduction worth $25,300, comprising $24,000 for couples filing jointly and John’s $1,300 extra deduction, since he’s 65.
  • The couple can no longer claim $8,100 in personal exemptions, but that’s offset by the couple’s higher standard deductions.

Scenario 2: Dallas doughnut shop owners

Robert and Susan, both 53, own and run a small business and file jointly. The couple have net business income of $100,000 and they own a home that they are working to pay off. In 2017 they claimed $20,000 in itemized deductions:

  • $8,000 in mortgage interest
  • $7,000 in property taxes
  • $4,000 in state and local sales taxes
  • $1,000 in charitable contributions

2018 result: Federal taxes will go down by $2,554.

What changes:

  • Their standard deduction nearly doubles. The new tax bill boosts the couple’s standard deduction to $24,000, up from $12,700. That exceeds the $20,000 in itemized deductions they took for 2017.
  • Their tax rate falls. The couple were in the 25 percent bracket in 2017. Under the new tax law, they’re in the 22 percent tax bracket.
  • They benefit from the new qualified business income deduction of 20 percent.
  • This couple’s qualified business income is $100,000 (net income from their doughnut shop), and their taxable income before accounting for this deduction is $68,935, which means they qualify for a deduction of $13,787. (This deduction, however, does not lower their self-employment tax.)

Scenario 3: The suburban family

Californians Julie and Nick are married and have two kids—a son in college and a daughter in high school. They own a home and both still work; their combined wages total $150,000. In 2017 they claimed $22,000 in itemized deductions on their tax return:

  • $8,000 in mortgage interest
  • $7,000 in state and local income tax
  • $4,000 in property tax
  • $1,000 in personal property tax
  • $2,000 in charitable contributions

2018 result: Federal taxes will go down by $2,577.

What changes:

  • Their standard deduction nearly doubles, but their exemptions go away. The new tax bill increases Julie and Nick’s standard deduction to $24,000, up from $12,700. Nick, 66, also gets the extra $1,300 standard deduction available to filers 65 and older. However, the couple loses $16,200 in personal exemptions they took in 2017. Net effect: They pay taxes on a larger amount.
  • They no longer need to itemize their deductions, since their standard deduction is higher than their itemized deductions of $22,000.
  • Their tax rate falls. The couple were in the 25 percent bracket in 2017. Under the new tax law, they’re in the 22 percent tax bracket.
  • They can take advantage of the Child Tax Credit (CTC). The new tax law raised income limits on families claiming the CTC and raised the level of the credit from $1,000 to $2,000. They can also get a $500 non-child dependent credit for their son, claiming a total of $2,500.

Scenario 4: Strapped with medical bills in Idaho

Deborah and Michael, both 66, pay $3,000 per month to cover medical expenses, using a home equity loan on their Boise home. They have $30,000 in Social Security income and pull in another $50,000 from a private pension. They claimed $40,975 in itemized deductions in 2017:

  • $30,975 in medical expenses (maximum allowed after applying the 7.5 percent adjusted gross income floor)
  • $5,000 in interest from home equity loan
  • $4,000 in real and personal property taxes
  • $1,000 in state and local taxes

2018 result: Federal taxes will go up by $1,549.

What changes:

  • Under the new tax law, the couple lose two significant tax breaks. They can no longer write off the $5,000 in home equity loan interest. They also lose $8,100 worth of personal exemptions. Those changes mean their taxable income increases by $13,100.

Scenario 5: The Midwestern widow

St. Louis retiree Donna, 75, lives alone in a condo she owns but has a second mortgage that she uses to pay for splurges and doctor bills.  Each month she receives Social Security benefits of roughly $1,400 and pension payments of just over $4,100, putting her annual income at $67,000. She claimed itemized deductions totaling $16,166 in 2017:

  • $5,166 of her $10,000 in medical expenses, as she could deduct only the amount in excess of 7.5 percent of her adjusted gross income
  • $4,500 in real estate and personal property taxes
  • $2,500 in state income taxes
  • $3,000 in mortgage interest
  • $1,000 in charitable contributions

2018 result: Federal taxes will go down by $233.

What changes:

  • Donna loses personal exemptions of $4,050.
  • She’s in a lower tax bracket. While she doesn’t benefit from the new higher standard deduction (since her itemized deductions exceed the standard $12,000 plus $1,300 for people 65 and older), the new law puts her in the 22 percent tax bracket in 2018, down from 25 percent in 2017.

Scenario 6: The big-city executive

Raymond is a single man living in a condo he owns in Manhattan. Last year he earned $500,000 as a senior vice president and claimed $135,000 in itemized deductions:

  • $55,000 mortgage interest
  • $46,000 state and local income tax
  • $24,000 real and personal property tax
  • $10,000 charitable contributions

2018 result: Federal taxes will go up by $6,396.

What changes:

  • His biggest tax deduction goes away. Under the new tax bill, the deduction for all state and local taxes (SALT) is limited to $10,000. Raymond’s SALT total, which includes both income and property taxes, is $60,000 over the limit. So his overall itemized deductions drop by that amount, to $75,000.
  • So does his personal exemption. Under the new law, the personal exemption was eliminated. That increases Raymond’s taxable income by $4,050 in 2018.
  • His tax rate goes up. Tax rates were reduced under the new law. But in Raymond’s case, the loss of $60,000 in SALT deductions pushes him into a higher tax bracket. The top rate he’ll pay on some of his income is 35 percent, compared to 28 percent in 2017.

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