THE FINAL TAX BILL : Elderly : Key Deduction to Dwindle for Retirees With Big Medical Bills
Tax revision would put more cash into the pockets of the elderly poor, but it could prove a financial blow for people hit by huge medical expenses.
There are 12 million taxpayers over the age of 65, and about 700,000 of them would no longer have any tax obligation because of the lower rates, according to the American Assn. of Retired Persons.
The proposed legislation removes poor people from the ranks of taxpayers and targets help “to those who need it the most,” said David Certner, a tax lobbyist for the association.
Tax-Free Incomes A single person over age 65 begins paying taxes at income of $4,640 or more under current law. This threshold would be raised to $5,700 in 1988, when the proposed legislation would take virtually full effect. A married couple, whose tax obligation starts at $7,990, would not face taxes until their income exceeds $10,100.
“Wealthy individuals and corporations will pay their fair share, and lower-income people will be removed from the tax rolls,” Certner said. “For middle-income persons, it’s clearly a mixed bag. There’s not a dramatic shift one way or the other.”
However, the 25% of the elderly taxpayers who itemize their returns face a weakening of a key deduction for medical expenses.
“If you are elderly and have large medical expenses, you can be hurt,” said Gillian M. Spooner, tax partner in the Washington office of Touche Ross & Co.
Uninsured medical costs in excess of 5% of adjusted gross income are deductible now. The proposed law would raise the figure to 7.5% of income, meaning more of the medical costs--hospital and doctor bills and drugs--would be borne without any relief under the tax code. Someone with an income of $20,000 and costs of $1,500, for example, now may deduct $500. Under the new plan, none of those costs would be deductible.
sh Gaps in Medicare This can make a big difference for the elderly, the population group most likely to amass large medical bills. Medicare, the federal health program for citizens over 65, helps pay hospital and doctor bills. But the beneficiary must pay for the first day of hospital charges and 20% of the bills from physicians. Medicare pays nothing for routine physical examinations, eyeglasses and hearing aids, ordinary dental work and prescription drugs.
The tax deduction has helped in bearing this rising burden of medical care.
For those over 65 who itemize, the medical deduction is the “big one,” Certner said. The largest middle-class tax shelter, the deduction for home mortgages, often is unavailable to the elderly. They frequently have paid off their home loans or have a small balance outstanding.
For example, a retired couple with an income of $15,000 and $8,000 in medical expenses now pay about $130 in federal income taxes, Spooner said. Under the new law, the value of the medical deduction would be cut and, therefore, the tax bill for this couple would climb to about $430.
Tax Break Lost In rewriting the tax code, the House and Senate conferees removed a special break for taxpayers over 65, the additional $1,040 personal exemption they now enjoy. Instead, the exemption would be virtually doubled, to $1,900 in 1987, and $1,950 in 1988, for all taxpayers, regardless of age.
Thus, the elderly would be treated like everyone else in 1987, although they will get a special sweetener in 1988, an additional $750 in the standard deduction, which is claimed by the vast majority of people who do not itemize on their federal tax returns. The standard deduction is subtracted from adjusted gross income: the greater the deduction, the lower the ultimate tax bill.
In 1988, the deduction would be $3,000 for a single taxpayer and $3,750 for a single person 65 or older. A married couple, claiming a $5,000 standard deduction in 1988, may claim an additional $1,200 if both spouses are over 65. If just one spouse is over 65, the additional deduction will be $600.
A blind taxpayer also will be entitled to the increased deduction.
In preparing the new tax code, “there was a shifting of the benefit away from anyone who itemizes,” said James Conley, tax partner in the Washington office of Arthur Young & Co. “Those who itemize lose the extra personal exemption and get nothing in return for it.”
However, the typical person over 65 would pay less taxes even though he or she no longer gets a special exemption, Spooner said. Lower tax rates are a powerful driving force to reduce the final bill. “The only thing that upsets it is if there are extraordinarily high medical expenses,” she said.
The American Assn. of Retired Persons and other advocates for the elderly tried to retain the double personal exemption, but there was no sentiment for it in Congress. The strategy then shifted to a “fight for something targeted to lower- and middle-income people,” Certner said.
Certain key provisions remain untouched by the restructuring of the tax code. Anyone over the age of 55 who sells a home can pocket the first $125,000 in profits tax-free.
Social Security benefits continue to be partially taxable, for single people with incomes of $25,000 or more and for couples with incomes exceeding $32,000. As much as half the Social Security benefit may be considered taxable income.
Someone who takes a chunk of cash when retiring could be hurt under the proposed law. Current law says the money is taxed as if earned over a 10-year period, even though it is being collected in a single year when the person leaves a job. By contrast, the proposed legislation would count the income as earned over five years, making for a much higher tax bill.
The elderly, as well as other investors, face some potentially difficult decisions this year on how to handle long-term capital gains--the profit from the sale of assets such as real estate, stocks and bonds held for more than six months. The current top tax rate of 20% would rise to 28% next year. Investors must choose between the likelihood of lower taxes, if they sell before year’s end, or potentially higher profits in the future if they keep the assets.
