The Trump tax cuts, officially called the Tax Cuts and Jobs Act (TCJA), are set to expire after 2025. While TCJA is mostly about lowering individual tax rates and making tax cuts to corporate profit permanent, it also includes some provisions for retirees. These retirees-related and other changes will revert back once TCJA expires after 2025. So, it is important that retirees (and those nearing retirement) reassess their financial decisions to ensure they are on the right path to meet their financial goals once TCJA expires. To help retirees evaluate the whole situation this article discusses how the expiry of Trump era tax cuts impacts retirees.
A brief history of TCJA
In 2017, President Donald Trump introduced a tax bill to simplify the tax system. On Nov. 2, 2017, Trump officially unveiled the Tax Cuts and Jobs Act (TCJA), which called for making sweeping changes to the current tax law.
After it was approved by the House and Senate, the bill was finally signed into law by President Trump on Dec. 22, 2017. The bill went into effect in January 2018, i.e., for the 2018 tax year. So, the bill didn’t affect many 2017 tax returns.
How expiry of Trump era tax cuts impacts retirees
Talking about how the expiry of Trump era tax cuts impacts retirees, we need to understand the following provisions of TCJA:
Standard Deductions
Trump’s TCJA almost doubled the standard deduction and restricted several itemized deductions for state and local taxes. Such changes resulted in many taxpayers moving to the standard deduction.
The standard deduction for singles and married filing separately is $13,850 for 2023 federal income tax returns ($27,700 for married filing jointly and $20,800 for heads of household). Those 65 years or older or blind can claim an extra standard deduction of $1,850. The deduction doubles for those 65 or older and blind.
So, the TCJA made it possible for many retirees to drastically reduce their taxable income. After 2025, i.e., after the expiry of TCJA, retirees will have to look for other ways to lower their tax liability.
Estate Tax Deductions
Trump’s TCJA significantly raised the estate tax exemption to offer relief to taxpayers when transferring their property to heirs. In fact, the TCJA more than doubled the lifetime estate tax deduction from $5.49 million to $11.18 million.
Moreover, the limit has increased each year since 2017, and for seniors, this limit has increased to $12.92 million in 2023. After the expiry of TCJA, the estate tax deduction will either return to the 2017 level or will be changed depending on the results of the 2024 presidential election.
Charitable Contribution Deductions
Most provisions of TCJA were pro-retiree, but increasing the standard deduction and limiting itemized deductions had an adverse impact on retirees as well, specifically through charitable contributions.
Charitable organizations serve as a major source of assistance to low-income seniors. So, it is very possible that a potential reduction of this tax benefit would have impacted many retirees and non-profits.
Although the charitable contributions that can be deducted from total income have increased from 50% of AGI (adjusted gross income) to 60%, the number of taxpayers who actually claim this deduction has dropped significantly because of the more lucrative standard deduction option. According to the IRS, more than 87% of taxpayers claimed standard deductions in 2018.
Income Tax rate
Presently, the individual tax rates are at historically low levels, but after the expiry of TCJA, taxpayers would have to pay higher taxes in 2026 and beyond. A higher tax rate will impact retirees more as they rely on fixed incomes with limited options to increase their income.
So, higher taxes would mean less money to spend, which could greatly impact retirees’ overall financial goals. The highest individual tax rate dropped from 39.6% to 37% under TCJA. Americans will have to reevaluate their financial strategies to adjust for the 1% to 4% increase in the tax rate after TCJA expires.
Additionally, the expiration of low tax rates may also impact the taxability of RMDs (required minimum distributions) from retirement accounts. Thus, retirees would have to make changes to their RMD strategies to minimize the impact of higher tax rates on such distributions.
What to do?
Now that you know how the expiry of Trump era tax cuts impacts retirees, let’s look at ways that can help retirees minimize the impact.
Unless lawmakers devise a way to restore the Trump era tax cuts, these benefits will expire after 2025. Thus, it is important that retirees start evaluating options to at least minimize the impact that the expiry of TCJA will have on their income.
It is recommended that taxpayers convert their traditional IRAs to Roth IRAs, which aren’t subject to mandatory distributions and provide tax-free withdrawals. Such a strategy could reduce taxable income and provide more control over retirees’ taxes.
Another strategy to minimize the impact is to diversify the retirement income by using tax-free sources, such as HSAs (health savings accounts), life insurance policies with cash value and more. This will not only reduce taxable income but will offer retirees additional financial stability as well.
Moreover, retirees can also use annuities or other tax-efficient investments. This would allow retirees to manage their future tax liability, as well as offer additional income in retirement.
Retirees can also look for ways to maximize mortgage interest deductions, make more charitable contributions and use other tax-advantaged strategies to minimize their tax liability after the expiry of TCJA.
