Whether you’ve already filed your taxes or waiting for April 15th, your 2017 taxes will be the last filing with significant changes. With the Tax Cuts and Jobs Act passed in late 2017, the United States tax code received its largest overhaul in decades. That means next year will be a whole different situation for lots of retirees and those preparing for retirement. Just like everything else in your retirement plan, preparation is the key. So, let’s take a look at some of the top changes you’ll see with the tax laws and what you need to prepare for.
As tax brackets change, retirees may need to adjust their distribution plans.
The new tax brackets change 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.
The standard deduction will become more standard.
Itemizing on a tax return can make sense for retirees with a high level of deductions and has been a common practice for some time. The standard deduction used to be $6,350 for single tax filers and $12,700 for joint filers. Those numbers have virtually doubled under the new tax law. Now, the standard deduction stands at $12,000 for single filers and $24,000 for those filing joint returns. This means for it to make sense to itemize, your deductible expenses will need to exceed these figures. Of course, there's nothing wrong with taking the standard deduction. If anything, it might make the tax filing process easier and less costly. Still, it's a change to be aware of.
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 provide even more advantages for retirees. Retirees are more easily able to move from state to state because they have no job tying them down, which also means they can be more sensitive to the various income tax rates in various states. There are a few that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.
These are just a few of the changes that come with the new tax laws and retirees would do well to consider reevaluating how it impacts their overall financial plan. Each area of a financial plan must be carefully considered to make sure you have a balanced plan. At Sound Financial Strategies Group, we thrive on helping our clients navigate retirement, and that means including a plan for dealing with your taxes. Give us a call today and let us help you navigate this important part of your retirement plan!