As a retiree, you deserve an easy-going, good life. Managing your retirement income and understanding how the $1.2 trillion tax overhaul signed into law by President Trump may affect your retirement funds is important. To save us all from boredom, we’ll stick to the five most important items of note (in our opinion).
These changes would be for next year’s taxes, to be filed in 2019. Tax returns for 2017 tax returns are due on April 17 . . .unless you extend.
5 Retiree Tax Updates Resulting From New Tax Law
Retirees will have to be more strategic about their IRA conversions
The new tax bill would stop what’s called “recharacterizations” of IRAs. Recharacterizations allow a person to undo their decision to rollover or convert accounts to Roth IRAs. Therefore, retirement savers who have already made these conversions this year should consider before the new year if they want to reverse them.
Check out this calculator to see if you’ll owe more or less next year: The Trump calculator — will you pay more or less?
And contribute to charity twice every two years
Retirees likely won’t be itemizing since they don’t have many deductions, except for charitable contributions, property taxes and perhaps state income taxes.
Some retirees may want to take advantage of Qualified Charitable Distributions, which allow them to donate directly to charity from their individual retirement accounts without having to itemize those donations (after 70 ½ years old). Because of the increase in the standard deduction, retirees may benefit from making more charitable donations, but less frequently — for example, donate twice as much, but every other year — which would help taxpayers by having more to write off than the standard deduction limit.
Personal income tax rates are changing, but still important
Personal income taxes would be lowered for most households — to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Retirees will have to watch their income to avoid ending up in a higher tax bracket. Income includes withdrawals from retirement accounts, required minimum distributions and ordinary income. For example, people with large balances might want to begin distributions before turning 70 ½ years old, when they’ll be required to take distributions in some accounts — that way, when they get there, they won’t be forced into a higher tax bracket.
It takes a little calculating, and predicting what income will look like in the future versus now, but it could save retirees money down the road.
Small businesses may not offer retirement accounts
Most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become even less advantageous for small businesses to host these accounts.
The bill reduces the income tax rate for small businesses but does not address offering or contributing to retirement plans, which are incentives to establish these accounts, according to the American Retirement Association.
Some retirees may want to move
Deductions for mortgage interest rates were left untouched, and $10,000 in local property taxes will be deductible on a federal level. That means income tax-free states will be best for retirees. Retirees are more easily able to move from state to state because they have no job tying them down, he said, which also means they can be more sensitive to the various income tax rates in various states. There are a few states that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.
The new bill also reduces the maximum amount of mortgage debt a person can acquire for their first or second residence, to $750,000 for married couples filing joint tax returns (or $375,000) for those married filing separately, down from $1 million. This won’t affect home purchases before Dec. 16, 2017 so long as the home closed before April 1, 2018.
If you have questions about the tax plan or about estate planning in general, give us a call at 817.638.9016.