The new tax laws have some far-reaching implications for retirees and pre-retirees. We have invited Tim Stephan, Director of Advanced Planning for Bearedin Milwaukee. We shall emphatically discuss about the implications of the new tax legislation for retirees.
To start with, it is about the headline news, which is that we have these much larger standard deduction amounts. Do you think that they will do away with a lot of tax payers itemizing their deductions? A large number of people are definitely going to be itemizing deductions.
Low single digits or low tens and twenties of that of people were going to be iodized much fewer people that have previously been itemized. Therefore, from the standpoint of tax preparation, document retention should make things a lot easier for all taxpayers approaching or in retirement even more, because they were less likely to be itemized.
It presumably didn’t have some of the traditional deductions that your mortgage interests were deducted correctly. They were more likely to take the scene. In this sense, the larger-standard deduction could be a real boon for some of them. To sum up your idea of bunching deductions, it involves the standard deduction in some years to save your itemized deductions for other years.
Some expenses will be incurred with a larger-standard deduction. Over the year, they are considered deductible, but aren’t big enough to get you over the threshold.
Instead of simply bumping up to it every year and never really getting the benefit of those expenses, you should try to bunch them into one calendar year. The techniques regarding medical expenses have been talked for long, because there’s always been that AGI threshold that a lot of people can’t get over.
It’s an adjusted gross income threshold. Some changes with this new tax law that reached back to 2017 have been seen. In terms of the medical expense, there’s always been an AGI threshold. Your expenses had to be more than a certain percent of your AGI before.
For a long time, it was seven and a half percent under the Health Care Act that changed to ten. Although there was some grandfathering that was built in 2017, it was supposed to be ten percent for everyone under the new tax law. Now it’s seven and a half percent for each for 2017 and 2018. In 2019, however, it is supposed to go back to the 10% for everybody.
On the year window, it is easier to claim the medical expenses than what it has been in recent history. This idea of trying to bunch as many medical expenses in one year as you can to get yourself over there throttle you have elective procedures.
For example, it’s a great idea in concept, but it’s harder to implement because you don’t always know what your expenses are going to be and you don’t always have control over. When you have medical procedures, you’re looking at things more on the INA margin, such as refilling prescriptions, eyeglasses, dental visits or elective things, and trying to get those all in one year.
Below are our views on what’s going on with state and local taxes as well as property taxes. To be specific, it is about what is going on within the terms of itemized deductions and these costs. For 2017, you’re able to take a full tax deduction for all of your state income taxes.
If you’re going to say that doesn’t pit charge an income tax, you can deduct your sales tax including any property taxes you were paying in your home or even in States charge of personal property tax. Those are all fully deductible in 2017 and 2018, which are still deductible. But the total of those expenses is up to $10,000, which applies, whether you’re single or married. Some people may be concerned about it.
A lot of people are going to get over that amount of money pretty easily between their state income by paying the state income tax rate loan. Putting the property tax on top of that, numerous people are going to find that the expenses that they would have to pay or would be deducted in 2017 are not going to be deductible anymore.
We may be reminded of people who may behave in more than one residence in two states or people who are considering relocating in retirement. People who are most negatively impacted by this change are those with multiple residences, where they’re paying property taxes on multiple rates or living in the high-tax States, such as the New York’s, California, New Jersey’s.
Illinois will claim to be there. Minnesota in some Mid-western states are high-tech states to those residents who are going to start running into limitations on their own. They may have already been having some issues with that because of the AMT, which is a separate issue, but that may have been eliminating.
Some of their state alternative minimum tax is correct, the alternative minimum tax might have been limiting their deductions in the past, but now it’s a hard cap on those dollar amounts. Whether they’re in AMT or not, they’re going to run into problems by deducting that. Thus, it becomes more expensive to have multiple homes, it becomes more expensive to live in some of those high taxes right.
You may start wondering what to do to minimize that expense? You may start considering relocating, maybe to another tax state. There are seven states that don’t charge any income tax.
There are a lot of different dimensions to decide on whether to relocate family residence. Buttaxes are absolutely in the mix. As to what’s going on with the mortgage interest, I mentioned that many retirees do not have mortgages, but many retirees are in fact carrying the mortgages into retirement.
What’s going on with the deductibility of mortgage interest? What would they do with the interest? There are a lot of changes being discussed that didn’t happen, but the ones that did happen were one they capped the deduction on new mortgages to $750,000 of debt. So the previous rule had been a million dollars of debt that rule any existing mortgages.
If you had a mortgage of over 750,000, you can continue to do like the interest on that up to a million dollars of debt, which are the new homes where you’re going to be capped. Provided you have a home and you’re thinking about buying a second home, that new home have a mortgage of 600,000.
The original home was out of six hundred thousand dollar mortgage and for the new home you can only pick up another hundred and fifty thousand of debt. You would not be able to do like the interest on that portion of the mortgage. For those who have already had two homes and their mortgages on them, they’re fine.
But if you’re thinking about acquiring a second home or relocating to a bigger home, you shall be aware of what these new deduction limits are going to be. Another dimension is this higher standard deduction, which may be larger than the amount that you’re able to amass with your total.
So there’s less interest you can deduct. Plus, it’s going to be hard to deduct, which would be within our larger standard deduction. Home equity loan and the interest under the new laws will no longer be deductible. In general, home equity and loan interest are not going to be deductible. It really depends on what you used a loan for.
Plenty of people use them to buy car a vacation. That interest will no longer be deductible if you used it to build a choir or substantially improve your existing home, in which case the interest would still be deductible. Nonetheless, it is not the typical use of home equity loans. Will the rule be substantially improved when making basic maintenance and repairs?
You can’t just replace a furnace, though I don’t think it’s for repainting or re-carpeting. Your roof might be substantially real. There’s some interpretation.
We are going to talk about all of the things that aren’t changing for retirees and pre-retirees on the retirement savings for a lot of things that we had been hearing might happen didn’t actually come to pass in the final legislation. There was a lot of talk leading up to it and throughout the fall and early into November. There was even going to be reductions in the amount. You can put into your retirement plans limiting the deductibility of those.
When you took it out to be tax-free, none of that ended up coming to pass. In this sense, all the rules you’re used to dealing with are basically the same as they were before when it comes to saving for retirement.
I am thinking of trying this idea of being able to do a do-over on your Roth, on your conversion from a traditional IRA to a Roth that re-characterization is going away, starting in 2017. It used to be the 1820s. If you did a Roth conversion, you had it until October 15th of the year.
After the year of the conversion to change your mind and re-characterize it back, that re-characterization opportunity has gone away. There’s little uncertainty as to whether that only applies to 2018 conversions. If it goes back to 2017conversions, that weren’t re-characterized before the end of the year.
I think most people are landing on those that are no longer allowed either. However, regardless of you haven’t done or if you do a Roth conversion going forward, you have to be prepared to leave it in there, because there’s no opportunity of going forward to undo it. You ought to be sure how about the idea of carrying out multiple conversions as a way to manage it.
You don’t have to do a one conversion during the year. Instead, you can do at one of the beginnings of the year. If you’re comfortable, you may try another one later on. You can spread them out through the course of the year from a tax standpoint. It doesn’t change, which is still the same amount of income tax.
You’re not making the big commitment upfront and you could also make the conversions over multiple years. Absolutely you can do it as many as you want and for as much as time of period.
There’s no income threshold, which means anybody can do them and finally the thing I want to center on is if someone happens to make the wrong type of IRA contribution. It sounds like that type of mistake would be able to be reversed correct. So if you put money into a Roth and it may turn out you’re not eligible.
One of the original proposals holds that you can’t re-characterize that either. It was a bad call and they fixed that. If you are making a contribution to a Roth and it turns out you failed, you can re-characterize that, which is the conversion. Then you have to be more careful with it.