How Expiring Trump-Era Tax Cuts Affect Retirees

The Trump tax cuts, officially called the Tax Cuts and Jobs Act (TCJA), are scheduled to expire after 2025. The TCJA is primarily about lowering individual tax rates and making tax cuts on corporate profits permanent, but it also includes some provisions for retirees. These retiree-related changes and others will revert when the TCJA expires after 2025. Therefore, it is important for retirees (and those approaching retirement) to reevaluate their financial decisions to ensure they are on the right track to achieve their financial goals once the TCJA expires. To help retirees evaluate the full picture, this article discusses how the expiration of Trump-era tax cuts will affect retirees.

A brief history of the TCJA

In 2017, President Donald Trump introduced tax legislation to simplify the tax system. On November 2, 2017, Trump officially announced the Tax Cuts and Jobs Act (TCJA), which calls for sweeping changes to current tax laws.

After being approved by the House and Senate, the bill finally became law with President Trump’s signature on December 22, 2017. The bill went into effect in January 2018, i.e. for the 2018 tax year. Therefore, this bill did not affect your 2017 tax return.

How Expiring Trump-Era Tax Cuts Affect Retirees

As we talk about how the expiration of Trump-era tax cuts affects retirees, we need to understand the following provisions of the TCJA:

standard deduction

Trump’s TCJA nearly doubled the standard deduction and limited several itemized deductions for state and local taxes. These changes have prompted many taxpayers to switch 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 households). If you are over 65 or visually impaired, you can claim an additional standard deduction of $1,850. The deductible is doubled for seniors over 65 and visually impaired.

Therefore, the TCJA allows many retirees to significantly reduce their taxable income. After 2025, or after the TCJA expires, retirees will need to find other ways to lower their tax liability.

estate tax deduction

Trump’s TCJA significantly increased the estate tax exemption to provide relief when taxpayers transfer property to their heirs. In fact, the TCJA more than doubled the lifetime estate tax exclusion from $5.49 million to $11.18 million.

Additionally, the limit has been increased every year since 2017, and for seniors, this limit has increased to $12.92 million in 2023. After the expiration of the TCJA, the estate tax deduction will return to 2017 levels or change as a result. 2024 presidential election.

Charitable Contribution Deduction

Although most of the provisions of the TCJA were pre-retirement provisions, increasing the standard deduction and limiting itemized deductions also had a negative impact on retirees, especially through charitable giving.

Charities serve as a key source of support for low-income older people. Therefore, it is very likely that this potential reduction in tax benefits would have impacted many retirees and non-profits.

Although charitable contributions deductible from gross income have increased from 50% to 60% of adjusted gross income (AGI), the more lucrative standard deduction option has significantly reduced the number of taxpayers who actually claim this deduction. According to the IRS, more than 87% of taxpayers claimed the standard deduction in 2018.

income tax rate

Current personal tax rates are at historically low levels, but after the TCJA expires, taxpayers will have to pay higher taxes after 2026. Higher tax rates will have a greater impact on retirees who rely on fixed incomes with limited options for growing their income.

Therefore, higher taxes mean less money to spend, which can have a big impact on a retiree’s overall financial goals. Under the TCJA, the top individual tax rate was reduced from 39.6% to 37%. Americans will need to reevaluate their financial strategies to adjust for a 1 to 4 percent tax rate increase after the TCJA expires.

Additionally, the expiration of lower tax rates may also affect whether required minimum distributions (RMDs) from retirement accounts are taxable. Therefore, retirees should change their RMD strategies to minimize the impact of higher tax rates on those distributions.

What should I do?

Now that you know how the expiration of Trump-era tax cuts affects retirees, let’s look at ways retirees can help minimize the impact.

Unless lawmakers devise a way to restore Trump-era tax cuts, those benefits expire after 2025. Therefore, it is important for retirees to at least begin evaluating their options to minimize the impact the expiration of the TCJA will have on their income.

Taxpayers are encouraged to convert traditional IRAs to Roth IRAs, which are not subject to required distributions and provide tax-free withdrawals. These strategies can reduce taxable income and give retirees more control over their taxes.

Another strategy to minimize the impact is to diversify your retirement income using tax-exempt sources such as health savings accounts (HSAs), cash-value life insurance policies, and more. This will not only reduce taxable income but also provide retirees with additional financial security.

Retirees can also take advantage of pensions or other tax-efficient investments. This not only helps retirees manage their future tax obligations, but also provides additional income in retirement.

Retirees can also find ways to minimize their tax liability after the TCJA expires by maximizing their mortgage interest deduction, making larger charitable donations, and using other tax-advantaged strategies.