What the New Tax Law Means for Seniors – Part 2

In last week’s blog I told you about some of the changes in the new tax bill.  This week I’ll cover some more as well as some changes that were discussed but didn’t happen.

       The mortgage interest deduction has been reduced.  Now taxpayers can deduct the interest on mortgage debt up to $750,000 for the purchase of a first or second home.  Anyone who has a current loan is grandfathered so that interest on existing loans of up to $1,000,000 is deductible.  Also, any refinance of a loan that was incurred before December 15, 2017 can qualify for the deduction up to the old $1,000,000 limit with certain restrictions.  Finally, interest on home equity loans and lines of credit – whether taken before or after the new law – is no longer deductible.

       529 plans have been expanded.  Now the funds in these plans may be used to pay tuition for public, private and religious elementary and secondary schools.  Previously, 529s could only be used to pay higher education tuition.

       The elimination of the medical deduction was something that was seriously discussed but did not make the final version.  For 2017 and 2018 medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income (AGI) and then in 2019 the expenses must exceed 10% of AGI.  This is especially important to seniors who are spending large amounts on long term care and can take advantage of the lower threshold to eliminate tax on IRAs which they might need to empty to pay for care.

       So, how will the other changes affect seniors?   The restriction on the deduction for state and local taxes could have a big impact in states with higher real estate and state income taxes.  New Jersey qualifies on both counts.  Some experts predict real estate values could drop by 10%.  For seniors who need to sell their homes as their health declines this could mean less money than they might otherwise expect to pay for care.  If you are counting on that money – for many a home is their biggest asset – it might be wise to consider selling before we start to see a drop in home values.

       Some seniors who have lower income might benefit from the changes.  If you don’t itemize your deductions, the restrictions on the deductions for mortgage interest and state and local taxes won’t mean anything to you.  The increase of the standard deduction to $12,000 for single individuals and $24,000 for married couples, however, could lower your tax bill.

       Finally, one more change that won’t affect most people.  The federal estate tax exemption which was $5,600,000 has been doubled to $11,200,00 per person.  This means federal estate tax is now only due on estates greater than $11,200,000 (transfers between spouses are still completely exempt).  If your estate was less than the old exemption then this increase is meaningless to you.  More importantly, however, the step up in basis at death did not change.  This allows taxpayers to hold onto appreciated stock until death and pass it on to heirs while eliminating the tax on the unrealized capital gains that has accrued.