The Tax Cuts and Jobs Act of 2017 will have a significant impact on taxpayers across the income spectrum. Many changes directly impact senior citizens because they are more likely to be retired. Also they are living on a fixed income. However, many of the changes affect all taxpayers who plan to retire in the future.
Some of these changes may help you save money on your taxes this year, but other changes may result in paying more taxes when you’re older and ready to start collecting Social Security benefits.
The following is an overview of how tax laws change for seniors. This article is not meant to be a comprehensive look at how the new tax laws affect every single taxpayer. Rather, it is a high-level look at some of the most important changes that will impact anyone over age 65 or so that plans to retire before age 70.
New Limits on Tax-free Retirement Accounts
As you approach and enter retirement, it’s important to remember that the government taxes all income, including money saved in tax-free retirement accounts such as IRAs, 401(k)s, and Traditional Medicare Advantage plans.
When it comes to IRAs, the government taxes the interest you earn as it builds up in your account. However, when you withdraw the money at retirement, the government treats that money as income and taxes it at your current income rate.
A Limit on the Number of Assets in Tax-free Accounts
Some taxpayers have been able to save enormous amounts of money in tax-free retirement accounts. The Tax Cuts and Jobs Act limits the amount of money you can contribute to tax-free accounts (except for Traditional Medicare Advantage plans), including traditional and Roth IRAs, 401(k)s, 403(b)s, the SEP IRA, and the SARSEP.
If you are over the age of 49, the Tax Cuts and Jobs Act places a new $6,000 limit on how much you can contribute annually to tax-free retirement accounts. In addition, if you are over age 50, you must also satisfy a new modified 10% investment rule.
This rule means that you can only contribute up to $6,000 if you have less than 10% of your original principal invested in stocks or mutual funds.
No More Deduction for IRA Contributions
Another change to the tax laws is that it no longer allows a deduction for money contributed to an IRA. This affects taxpayers regardless of their income level. The good news is that you don’t have to itemize deductions to take advantage of these savings.
Higher Income Threshold for Roth IRA Contributions
The Tax Cuts and Jobs Act also raises the income threshold for Roth IRA contributions. If you earn a high enough income, you might not be able to make Roth IRA contributions at all. The new income threshold to make Roth IRA contributions is $133,000 for single filers and $196,000 for married filers.
Lower Tax Breaks for Mortgage Interest and Equity Purchases
The Tax Cuts and Jobs Act also reduces the amount of money that taxpayers can write off for mortgage interest and equity purchases. The new law lowers the amount of money that can be written off for interest on home mortgages from $1 million to just $750,000.
Furthermore, the new tax laws also limit the amount of money that can be written off for equity purchases. Such as the down payment on a new home.
Conclusion
Although the Tax Cuts and Jobs Act brings some significant changes to the tax code. It’s important to remember that every taxpayer has different opinions of the law. Some taxpayers may benefit from the new law, while others may experience a spike in their tax bills.
The best way to determine how these changes will affect you is to sit down with a financial advisor who can help you understand how these changes impact your financial future.
