How the 2018 Tax Changes will Impact Michigan Retirees and Planning Tips

Over Christmas I spent some time with my brother in-law in New York City.  Over a couple $13 beers, New York is ridiculously expensive, we started talking about a home that he was considering buying.  The home didn’t look a whole lot different than my house here in Michigan.  About the same square footage, slightly smaller yard, and even the same kitchen cabinets.  Yet, there was one major difference between my house in Michigan and his potential home in New York; roughly $30,000 in property taxes per year.  I currently pay around $5,000 per year in property taxes here in Michigan, his would be closer to $33,000! I guess this helps explains the $13 beers.  Needless to say, he wasn’t real excited about the potential tax bill, as it would greatly limit the amount of property taxes he would be able to deduct on his taxes and as a result, increase his tax bill. Thankfully, the new tax bill should benefit most of us in Michigan, but there are some big changes that are in store.  This article discusses some of the changes that will take place for us Michigan retirees, and how to best take advantage of the new tax bill.  

If you are looking for a really comprehensive review of all the tax law changes, check out this excellent article  by Michael Kitces.  

Lower Tax Brackets

The biggest benefit for us here in Michigan, and everywhere, are lower tax brackets across the board.  Many retirees here in Michigan fall into the current 15% or 25% tax bracket.  Both of these tax brackets have been reduced to 12% and 22% respectively.  If you fall into the higher tax bracket, currently 28%, you get an even larger reduction to 24%.  The only tax bracket that will not be changed is the lowest 10% tax rate.  Below is a good recap from Fortune, breaking down the new tax brackets.  

Single Individuals

Single Tax Bracket

Married Filing Jointly

Joint Tax Brackets

Higher Standard Deduction and Elimination of Personal Exemptions

One of the GOP’s hope with this tax bill was to make filing your tax return easier.  No, you probably won’t be sending your tax return back on a postcard anytime soon, but the higher standard deduction should make things easier.  As a result of the higher standard deduction, and limiting certain itemized deductions, most of us here in Michigan will be taking the standard deduction and itemized deductions will go away.  

First, as a reminder when you are filing your taxes, you get to take the higher of your standard deduction or itemized deduction.  Previously, for a married couple, the standard deduction was $12,700 and $6,350 if you file single.  Now, two big changes will force most people to use the standard deduction.  First, the standard deduction will nearly double to $12,000 if single and $24,000 if married and filing jointly.  Second, your SALT (State and Local Tax) deduction is limited to $10,000.  SALT includes both your real estate taxes and Michigan state taxes.  So, even if you are in an area with higher property taxes, you are limited to how much you can deduct going forward.  Hence, the reason why my brother in-law wasn’t too excited about limiting his $33,000 in property taxes that he was going to pay.  

The doubling of the standard deduction should be a big benefit to retirees, who many don’t have a lot of Michigan state taxes  and maybe have a lower mortgage payment.  The issue is that the new tax plan eliminates the personal exemption.  The elimination of the personal exemptions makes the doubling of the standard deduction not nearly as beneficial.  Here is a chart of the previous vs. the current tax proposal standard deduction and personal exemption.  

Single Married
Previous Standard Deduction $6,350 $12,700
Previous Personal Exemption $4,050 $8,100
Previous Total $10,400 $20,800
Previous Add’l deduction over age 65 $1,550 $2,500
Previous Total if over age 65 $11,950 $23,300
New Tax Plan $12,000 $24,000

Pretty good chance that the new higher standard deduction will be beneficial, but the elimination of the personal exemptions make it a very small benefit for Michigan retirees.  

The Result Should be Lower Taxes

As a result of lower tax brackets and increased standard deduction, most Michigan residents should see a decrease in their taxes. According to the Tax & Policy Center over 90% of Americans will receive a tax cut, with the average tax cut slightly more than 2% per person in 2018.  I would expect most Michigan retirees to get a tax break.  The people who will pay more, will typically live in high tax states with high real estate taxes, like my brother in-law.  

Planning Tips for Michigan Retirees in 2018 and Beyond

  • Consider Roth conversions – These lower tax brackets won’t last forever.  Most of these tax cuts will expire after 2025 and if not extended, taxes will revert to the previously higher tax brackets.  This is a great time to convert your pre-tax assets to Roth accounts at the lower tax brackets.  
  • Your charitable giving may not be deductibleAs I mentioned previously, most Michigan retirees will not be itemizing deductions any longer.  As a result, your charitable contributions may not be deductible any longer.  If you are over the age of 70 ½ and want to continue to make charitable contributions, you may want to consider Qualified Charitable Contributions  (QCDs).  
  • Have financial advisory fees come out of your IRAThe new tax bill eliminates all miscellaneous deductions, including financial advisory fees.  Pulling the fees from your IRA allows you to pay your management fee with tax free withdrawals.  
  • Buy StocksThe biggest benefactor of the tax reform will be corporations.  The corporate tax rate will decrease from 35% to 21%, which should significantly improve corporate earnings and could boost the stock market.  
  • Go on that vacation that you have been putting offThis may be a great time to take a distribution out of your retirement account and go on that extra vacation or do that home update that you have been putting off.  The stock market has been doing fantastic and you are hopefully seeing your retirement accounts move higher.  Also, any distribution that you take this year should be taxed at a lower rate because of the tax cuts.  Remember why you saved this money in the first place; it was to spend it and have an enjoyable retirement.  Now is a great time to spend it.  

 

 

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