submitted by Brian J. Delaney, Esq.
The proposed Trump tax plan makes some significant changes to the Internal Revenue Code. Although being promoted as major middle-class tax relief, some seniors may actually face a massive tax increase. Under the proposed plan, taxpayers could no longer itemize medical expenses on Schedule A. The current tax code allows a taxpayer to take an itemized deduction for medical expenses that exceed 10% (or 7.5% if born before 1952) of their adjusted gross income.
It is true that most taxpayers do not have enough medical expenses to take a deduction. However, long-term care is extremely expensive and the ability to deduct these expenses can greatly reduce or eliminate both federal and MA income taxes for some seniors.
Imagine that Bob is a widower with advanced Alzheimer's disease. He is 85 years old and although he cannot live alone, he is relatively healthy other than his memory issues. His family found a nice assisted living facility with a secure memory unit. The facility does not accept MassHealth/Medicaid and costs $8,000 per month (or $96,000 per year).
Bob receives about $20,000 per year in social security benefits and he has a $700,000 traditional IRA. It is conservatively invested and generates a 5% return. His medical insurance premium is $300 per month and he spends about $100 per month on co-pays and other out of pocket expenses.
Withdrawals from a traditional IRA are considered taxable income. Currently, Bob can withdraw $85,000 from his IRA each year and take an itemized medical deduction for the assisted living expenses, medical insurance premiums, and co-pays. Under current tax law, this eliminates nearly all of his federal and Massachusetts income tax.
Assuming Bob withdraws $85,000 per year out of his IRA), he can privately pay for 10 years of assisted living.
If Bob can't itemize his medical expenses under the new tax plan, then he will only be able to pay for 6 years of assisted living. In order to net $85,000 after taxes, he will need to withdraw $115,000 from his IRA each year. Because he won't be able to deduct his medical expenses, he will owe almost $30,000 in federal and Massachusetts taxes each year.
What happens after Year 6 under the Trump tax plan? Bob will have no money and will likely need to move to a skilled nursing home facility that accepts MassHealth/Medicaid, even if the assisted living is a better placement.
How do the Trump "tax cuts" help Bob? He will pay an additional $180,000 in income taxes over the next 6 years.