Seniors and The Congressional Joint Tax Code Overhaul

A couple of weeks ago, Congressional Republican leaders reached an agreement on the final version of their tax bill, indicating the potential passage of the largest tax code overhaul in more than a decade.  The GOP moved quickly to pass the bill and claimed a victory in a year otherwise marked by a series of unsuccessful attempts to pass legislation, and a fire stoked by Democrat Doug Jones’ surprising win in Alabama’s special election for a US Senate seat.  But what effects will these changes to the tax code have on individuals?  And how does this affect seniors, particularly those who rely on Social Security or Medicare?

Most of the significant changes affect the country’s high-income individuals.  For high-earners in the top individual bracket, tax rates will drop down to 37% (a rate lower than both the House and Senate versions of the bill).  This will apply to a larger number of people than the earlier versions of the bill—those with incomes below the $1 million cutoff may still claim the marginal tax rate.  The alternative minimum tax for individuals will apply to those who earn $500,000 or above, and families who earn over $1 million.

The very popular mortgage debt interest deduction will be reduced.  The cap, which currently sits at $1 million dollars, was maintained in the Senate bill, but was reduced to $500,000 in the House version.  The joint version splits the difference and lowers the cap to $750,000.

The estate tax, which was phased out over time in the House bill, remains in the joint version, but has an increased threshold for qualification.  Rather than the original $5.6 million estate value needed to qualify, under the new bill, estates will need to have a value of approximately $11 million.

The joint tax plan also allows individuals a flexible option to write off up to $10k in property taxes, income or sales taxes paid, or to write off a combination of property and sales of property and income taxes as an individual deduction.  This provision is generally seen as consolation to House Republicans concerned about state and local tax deductions(which will no longer be available), primarily those from states like California, who were viewed as a potential liability to the bill’s passage if their concerns were not addressed.

As expected, the bill also repeals the individual mandate for health insurance under the Affordable Care Act, a move which critics, including health insurance companies and the AARP, claim will destabilize the healthcare marketplace and send premiums skyrocketing.  The individual mandate, which required all Americans to purchase health insurance or pay a penalty, is an essential component to the ACA, also known as Obamacare.  Despite voting against previous attempts to repeal the ACA, Republican Senators John McCain and Susan Collins supported the joint tax bill and the included provision revoking the individual mandate, although several Republican senators, including Senator Collins, expressed concern about specific portions of the bill as a whole.  The joint bill does however maintain individual deductions for medical expenses, a highly popular provision which was previously in jeopardy.

With Doug Jones’ election, the narrow Republican majority has grown even slimmer, and with Senator Bob Corker of Tennessee, the only Republican to vote against the bill in the Senate, claiming that the new version of the bill did not address the issues that caused his initial “No” vote, Republicans voted as soon as possible.  They did not intend to wait for Doug Jones to be sworn in, ignoring calls by Democrats to wait until the new senator was formally seated before a vote.

In terms of the impact on seniors, the joint bill’s agreed-upon terms remain to be seen, but the AARP’s analysis of the Senate’s bill concluded that it will raise taxes on over a million senior citizens due to changes in credits and deductions.  A significant portion of this is likely tied to the removal of medical deductions, which was no longer included in the joint bill, but until the complete text of the joint bill is available for analysis, it is difficult to fully determine the anticipated financial impact on seniors.   

It is also worth noting that the anticipated cost of the tax plan ($1.5 trillion) is likely to cause sequestration—universal spending cuts to mandatory programs like Customs and Border Patrol, the Affordable Care Act, and, if the costs were not sufficiently covered by other programs, Medicare, which covers over 80% of seniors.  Although Medicare cuts are limited to 4% per year, as long as a significant deficit remains, those cuts have the potential to become permanent.

Social Security is also likely to be affected by the tax overhaul.  The Senate bill includes a change which shifts the formula used to calculate cost of living increases for Social Security, disconnecting it from the Consumer Price Index, the current standard, and linking it to the Chained Consumer Price Index, which assumes that consumers will downgrade to less expensive goods and services should the current status quo increase in price.  The Chained Consumer Price Index results in lower cost of living increases and compensation for inflation.  Although there is no guarantee that the government would disregard the Consumer Price Index, if the deficit is significant and the Chained Consumer Price Index is a way to reduce Medicare and Social Security payouts, it seems like a logical progression that the government would try to save money in any way it could—in this case, reducing annual cost of living increases for Social Security and Medicare beneficiaries.  

Regardless of the obstacles, Republicans rushed toward passage in a final, year-end sprint to end 2017 with at least one victory in their ledger.  And with effects that would be felt almost immediately, the tax plan is a big win for a GOP struggling against an opposition that has, thus far, stymied their attempts at substantive policy and legislation.  After the military denial of President Trump’s transgender service member ban and the Democrats’ Senate win in one of the most historically red states in the country for the first time in a quarter-century, with the tax code overhaul’s immediate results and somewhat delayed consequences, Congressional Republicans are desperate to establish a success that they can point to in 2018.

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