Congress is nearing passage of a $1.5 trillion tax cut that would mostly benefit businesses and high-income households. For older adults, the effects are complicated. Some will receive large tax cuts. Some will be no better off and a few will be worse off. But beyond the immediate tax changes in the bill, the measure sets the stage for what promises to become a major battle in 2018 over critical programs such as Medicare and Medicaid, and over the way future Social Security benefits are calculated.
On average, high-income seniors will receive a substantial tax cut, while those with low- and moderate-incomes will pay roughly the same in taxes as they do today. And it appears that Congress will preserve—at least temporarily–some important tax benefits for seniors, including the deduction for medical expenses. Indeed, it will make that deduction slightly more generous, at least for next year.
The bill is also likely to include provisions that would significantly increase premiums for middle-aged people who are not yet eligible for Medicare and buy insurance on the Affordable Care Act’s health exchanges.
Small tax cuts for most
While the final version of the bill, called the Tax Cuts and Jobs Act (TCJA), will not be made public until late today, and Congress may still make changes before it votes next week, we have a good sense of what the measure will look like. The Senate version, which the final bill will resemble, would cut taxes for older adults by an average of about $1,000 in 2019, according to an analysis by the Tax Policy Center. Those making less than about $33,000, whose income is primarily from Social Security, already pay very little federal income tax. Thus, they’d see almost no benefit from the new tax bill.
Middle-income seniors, who make between $33,000 and $56,000, would get an average tax cut of about $300. However, because they also pay relatively little in income tax, that change would represent a tax cut of about 9 percent.
Big tax cuts for some
The story would be very different for high-income households. They would benefit from individual tax rate cuts and, because much of their income is from investments, from big cuts in corporate taxes. Wealthy seniors would also benefit from the bill’s roughly doubling of the estate tax exemption so that couples could avoid federal estate tax on the first $22 million of their bequests.
As a result, those making $430,000 or more (the highest-income 1 percent) would get an average tax cut of $26,000 in 2019. The 40,000 seniors in the top 0.1 percent, who will make $2 million or more in 2019, would get a tax cut of almost $60,000—through it would represent a cut of only about 2 percent.
But this bill is not just about the direct effects of the tax cuts themselves. A provision to kill the individual mandate to purchase insurance under the ACA will end an incentive for young, healthy people to buy insurance, driving up premiums by as much as 10 percent-a-year for older buyers. Over time, that is likely to drive many out of the insurance market, putting them at risk for significant medical costs.
Inflation changes for Social Security
By doubling the standard deduction and limiting the itemized deduction for state and local taxes, the bill also would result in millions of taxpayers shifting to the standard deduction. That in turn would eliminate their tax benefit for making charitable gifts to non-profits—a major source of assistance to low-income seniors.
The tax bill also changes the way the federal revenue code is indexed for inflation. It would shift to a less generous method known as the chained consumer price index. Once Congress accepts this change for taxes, it will be much easier for lawmakers to do the same for benefit programs such as Social Security.
Finally, the bill sets the stage for a GOP effort to cut government spending in the name of reducing deficits. House Speaker Paul Ryan and his allies have already begun laying the ground work for their next initiative: cuts in Medicare, Medicaid, and other programs that benefit older adults such as food stamps. In the name of reducing the national debt (which they will have just increased by more than $1 trillion with their tax cut) they will aim to make fundamental changes in many of these programs.
Limiting the federal share of Medicaid and or cutting food stamps would immediately reduce assistance to today’s low-income seniors. Medicare cuts could result in higher premiums for beneficiaries and reduced payments to doctors and hospitals.
Over time, the Tax Cuts and Jobs Act may have a profound impact on older adults, not just in terms of the taxes they pay but also in the benefits they receive.