Tax Reform & Retirees
Larger standard deduction likely beneficial
Although there wasn’t a change to how Social Security payments are taxed, or the amount of taxes due on retirement plan withdrawals, the larger standard deduction is likely to be beneficial to most retirees.
The tax reform law almost doubles the allowed standard deduction - $24,000 (married filing jointly) and $12,000 (individual). For younger people, itemizing their charitable contributions, state taxes, and mortgage interest often provides the most tax benefit. But, for retirees without a mortgage, this increased standard deduction may be the best choice.
The tax reform bill also kept the “additional standard deduction” that was available for those at least 65 years of age. This additional deduction is $1,300 each for married couples, or $1,600 if filing individually.
Because of the changes to the standard deduction, many retirees can plan on keeping more of their money, even after the tax bill eliminated the personal exemption.
- Mike and Carol are married and 67 and 65, respectively. Under the old law, they would have had a $13,000 standard deduction, $1,300 each in additional deductions, and $8,300 of personal exemptions, for a $23,900 final total. The new tax law gives them a $24,000 standard deduction and $1,300 each in additional deductions, with a $26,600 final total - a full $2,700 over the previous law.
IRA Charitable Contributions
The tax reform did not change the provisions surrounding charitable gifts from IRAs. This provision allows those 70 ½ years old to make donations of as much as $100,000 from their IRAs directly to a charity. These donations are counted toward the required annual distribution.
For those taking advantage of this, it is usually a very tax efficient approach since they are still allowed to take their standard deduction along with this charitable tax break.
Although there is not a deduction available for gifts from IRAs, a charitable withdrawal reduce taxable income. One benefit of this is potentially lower Medicare premiums and lower taxes on investment income, since these are tied to income.