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How the New Federal Law Affects Taxes on Retirement Income

Just thinking about taxes is … well, taxing. And with Tax Day (April 17 this year) fast approaching and new tax laws about to take effect, it’s no wonder that older adults are wondering just how this will affect their taxes on retirement income.

Many seniors are turning to AARP to help them decipher how these changes might affect their retirement income – especially Social Security and pensions. Lisa Lamkins, advocacy director at AARP’s Wisconsin office, says the most commonly asked question is indeed in regard to taxes on retirement income. But many seniors, or their families, also want to know more about deductions related to assisted living, nursing homes, medical expenses, property taxes – and whether it’s better to take a standard deduction. Whew!

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No Changes to Taxes on Retirement Income This Year

All these questions surrounding federal taxes on retirement income have even the experts scrambling. But the short answer is good news: At least for now, “Seniors won’t actually experience any changes related to taxes on retirement income when they file this year,” says Lamkins.

Ron Tauchen, who coordinates the Dane County, Wisconsin, AARP Tax-Aide program, concurs. Tax-Aide provides free tax assistance to seniors at senior centers and libraries across the country. Tauchen sees many relieved faces when he tells them they don’t need to do anything differently this year regarding taxes on retirement income. “As far as retirees are concerned, any changes will mainly apply to next year,” he explains.

Ironically, the one thing that might affect some seniors when filing their 2017 taxes is something that did not change. That’s the deduction for medical expenses. “For people that itemize deductions, the threshold for deducting medical expenses is going to stay at 7.5% of total income instead of increasing to 10% as proposed,” says Tauchen.

For example, if you made $100,000, you can deduct any medical expenses greater than 7.5% of your income (or $7,500 in this case). So if you had $30,000 in medical expenses, you could deduct $22,500 (or $30,000 minus $7,500).

taxes on retirement income

“The new tax bill is complicated, but this is the one thing coming out of it that was an immediate positive for many older adults,” Lamkins says. “As people get older, income often decreases right at a time when they start to need more medications or health care.”

After a lot of debate and discussion, lawmakers decided to stick with the current 7.5% medical-expenses threshold for the 2017 and 2018 tax years.

“This will affect people in nursing homes, assisted living centers or those with chronic conditions that require medical equipment or expensive prescriptions,” Lamkins says. “But it’s important to note that this decision is only guaranteed for two years before it comes up for debate again.”  Currently, the threshold is set to return to 10% for the 2019 tax year.

As for now, one of the other top headlines coming out of the new tax bill is another non-change. Although the U.S. House of Representatives wanted to limit the amount of pre-tax contributions workers could contribute to their 401(k) or other retirement funds, the change didn’t make it into the final federal bill.

retirement taxes

Planning for Taxes on Retirement Income Next Year

“Looking ahead to 2018, the most important change for seniors will be an increase that almost doubles the amount of the standard deduction allowed,” says Tauchen.

For people who don’t itemize (which includes many seniors and retirees), that means individuals can claim a $12,000 deduction and married couples filing jointly can claim $24,000 when filing their 2018 taxes. That’s up from the previous $6,500 for singles and $13,000 for couples – making it a much better and easier choice for many older adults.

In fact, even retirees who own high-end properties or vacation homes may take the standard deduction next year due to tax changes reducing the amount they can deduct for state and local (SALT) income, sales, and property taxes in a year. The total deduction will be capped at $10,000 beginning in 2018.

retirement financial advisor

What about federal taxes on Social Security? No worries.

“The GOP has broached the possibility of cuts to entitlements such as Medicare, Medicaid, and Social Security,” says Lamkins, “but the bill doesn’t make any changes to Social Security right now – and that’s certainly good news for seniors that [sic] consider Social Security their primary source of income.”

While seniors won’t be seeing any significant changes to their taxes in retirement when they file this year, experts recommend meeting with a tax professional or retirement financial advisor well before tax time next year.

“There are a lot of free resources like the AARP Tax-Aide program and other volunteer organizations that can help,” says Lamkins. “The main goal is to know, ahead of time, what you can expect.”

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  • Sue Sveum

    About :

    After helping her own parents as they aged, Sue began working with other seniors, and now shares what she learned in her blogs for seniors and their families. She currently writes about seniors and healthcare for several websites but her past includes diverse topics ranging from dogs to weddings to ghosts. She lives in Madison, Wisconsin with her husband and Golden retriever, Wrigley.

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