At first glance, the GOP tax proposal that was released should be a huge benefit to retirees here in Michigan. Probably the biggest reveal that came from the announcement is that the standard deduction will be nearly doubled. Here are the highlights:
- Currently, the standard deduction for a single individual is $6,350 and $12,700 for a married couple filing a joint tax return.
- Under the new GOP proposal these deductions will be nearly double to $12,000 and $24,000 respectively.
- In other words for a married couple, at a minimum, the first $24,000 of income will be tax free.
In theory, this sounds amazing and should be a huge tax benefit for retirees. Yet, before you start spending that extra tax refund, we need to take a look at how taxes actually work.
First, let’s talk about tax basics. A person is able to deduct the higher of the standard deduction or itemized deduction. As mentioned previously, for a married couple the standard deduction is currently $12,700. If your itemized deductions are over $12,700, you would itemize deductions and get the higher amount knocked off your income for the year. The most common itemized deductions include mortgage interest, real estate taxes, and either state taxes or general sales tax. In other words, if you own a home and have a mortgage, there is a pretty good chance that you are able to itemize your taxes and get the higher tax deduction. Many retirees however have potentially paid off much of their mortgage and don’t have much interest to write off, if any. Also, thankfully, Michigan is a pretty low tax state. We have a fairly low state tax rate (4.25%) and reasonable real estate taxes. Therefore, many Michigan retirees don’t have many itemized deductions and instead take the standard deduction.
So, if most retirees take the standard deduction and now the standard deduction is going to be nearly doubled, isn’t that great news? Not necessarily. There is an important line in the tax proposal that appears to eliminate an important deduction that almost all families can take currently.
The exemption that is appears to be referring to is the personal exemption which is a huge tax deduction available to most Americans. For 2017, the personal exemption is currently $4,050 per person. There is also an additional deduction that seniors can take if you are over age 65. This deduction is $1,550 for a single individual and $1,250 if you are married and one person is over age 65, or $2,500 if both are over age 65.
Let’s breakdown the current deductions and exemptions that are available.
|Add’l deduction over 65||$1,550||$2,500|
|Total if over age 65||$11,950||$23,300|
|New GOP Proposal||$12,000||$24,000|
If you are married and both spouses are over 65, you will potentially be able to deduct a whopping $700 more than you can now. For a single individual the proposed policy would allow you to deduct only $50 more! Sure, this is better than what you may have now but there is a huge caveat. The new tax proposal potentially comes with a higher tax rate.
In order to make the tax system easier to understand, the proposed plan sets tax rates at 12%, 25%, and 35%. There is no guidance on where these rates start and end, but the lowest tax rate is currently 10%. Therefore, at least for the first dollars of taxable income, you would now be taxed at a higher rate. Again, there are a few unknowns and there will certainly be a lot of changes before the final bill is hammered out. Right now though this fantastic sounding tax break is looking more like a marketing ploy than any tax relief, especially for retirees.