New Tax Law

Tiny tax cuts for middle-class Americans, big tax cuts for wealthy Americans, and huge tax cuts for corporations—that’s the new tax law in a nutshell. In December, the $1.5 trillion tax law was signed into law by President Donald Trump, after a 51-48 vote in the Senate and a 224-201 vote in the House, with no Democratic support.

“Hypocrisy is at the heart of the tax bill approved by Congressional Republicans,” said NEA President Lily Eskelsen García in December upon its passage. “It is nothing more than a massive transfer of wealth—a giveaway to corporate special interests and the wealthy paid for by working families and students...In the end, this disastrous bill will push crushing debt and tax increases onto the middle class while Medicare, Medicaid, and education will take the brunt of the cuts.”

With the tax law’s passage, which is expected to add $1 trillion to the national debt, Congress has paved the way for drastic cuts to Medicare and education, warns NEA Government Relations Director Marc Egan. “The next phase,” he says, will be the “calls to cut the growing deficit by slashing services that help our most vulnerable citizens, including…Medicare.”

At the heart of the new tax law is a tremendous tax cut for corporations—down from 35 percent to 21 percent—that Congress made permanent.

Modest cuts to income taxes on middle-income Americans also were included—from 25 to 22 percent in 2018—but they decrease in following years and expire in 2025. By 2027, the end result will be a $180 tax increase, on average, for more than half of all Americans, according to an analysis by the non-partisan Tax Policy Center—and a historic increase in the national deficit.

Changes to the tax law also include:

An increase in the standard deduction. This year, it nearly doubles in size to $12,000 for individuals and $24,000 for married couples who file jointly. Adults aged 65 and older have an even bigger standard deduction—$13,600 for individuals and $26,300 for married couples who are both over 65.

The elimination of the American Care Act penalties for Americans who opt not to have health insurance. By 2027, this means 13 million more Americans will not have health insurance, the Congressional Budget Office has estimated; as a result, premiums are expected to rise by 10 percent, on average, per year, but older Americans likely will see more significant increases.

New limits to the amount of state and local taxes that can be deducted from your federal income tax, which likely will lead to significant cuts in local and state education spending, and new limits on mortgage interest deductions.

Many of the changes to the tax law will have specific consequences for NEA-Retired members. To learn more about just a few of those changes, keep reading.

The state and local tax deduction

Under the old rules, federal taxpayers could deduct the full amount of their state and local taxes, no matter how high they were. In the new law, this century-old fixture of federal tax law is undone, as the annual deduction for state and local taxes (SALT) is capped at $10,000. (Interestingly, even as individual taxpayers lost their full SALT deduction, Congress made sure that corporations kept theirs.)

This is bad news for NEA-Retired members for two reasons. First, it has the potential to blow an enormous hole in local funding for public schools—something many retired educators care deeply about. “Capping the SALT deduction could have a negative, ripple effect on the ability of states and local communities to fund education and other essential public services adequately,” explains Egan. “In turn, that could translate into cuts to public schools, lost jobs, and overcrowded classrooms.”

In December, an NEA analysis found that changes to the SALT deduction could “put 133,000 education jobs at risk and reduce education funding by as much as $152 billion in the next decade,” Egan warned lawmakers.

It is “the beginning of a cycle of disinvestment from public education,” warns Michael Dannenberg, director of strategic initiatives for policy at Ed Reform Now.

Second, many NEA-Retired members live in states where local and state taxes—and services—tend to be higher, including more than 50,000 in California, New York, and New Jersey. Without the full SALT deduction, many will be paying more in federal taxes.

It’s possible the new tax law may nudge retirees to move to lower-tax states, but they will pay a different kind of price, retirees warn.

“I tell my friends up in Massachusetts that the taxes here are amazingly low and ‘we have the schools to show for it,’” says Paul Phillips, past president of the Quincy Education Association and current resident of North Port, Fla. “If we care about kids…the tax situation is certainly not an attraction. It is a fact though, and the reduced circumstances of pensions may make such a relocation necessary.”

Still, with more education-minded retired educators in a state like Florida, local and state politics could be impacted, suggests NEA-Retired member Carol Lerner, who lives now in Sarasota, Fla., where she has formed an organization dedicated to fighting school privatization. “I was very active in my New Jersey Education Association local union and NJEA-Retired, but I am 10 times more active here in Florida.”

What about healthcare?

The costs of healthcare during retirement are huge—and growing. In 2017, a married couple retiring at age 65 could expect to spend an average $275,000 on healthcare over their next 20 or so years, according to Fidelity. That is 6 percent more than the estimated projected cost for retirees in 2016.

Unfortunately, the new tax law is likely to make it worse.

While the new law preserves the medical expense deduction, a good thing that allows taxpayers to deduct medical expenses that exceed 7.5 percent of their income, the law also repeals the penalities in the Affordable Care Act that have encouraged almost all Americans to have health insurance.

CBO has estimated that by 2027, this will mean 13 million more Americans without health insurance. Because healthier people tend to drop coverage, leaving an increasing density of people who are less healthy, or costlier, premiums in the individual marketplace will jump 10 percent per year, on average, the CBO estimates.

Older Americans may be particularly hard hit by these rising premiums: An AARP state-by-state analysis found that 64-year-olds in Wyoming will pay $2,562 more per year, on average, while 64-year-olds in Tennessee face an estimated $2,189 increase.

For now, Medicare is unaffected. Even though the tax bill has grossly widened the national deficit, which normally would trigger automatic spending cuts to Medicare under the federal “pay-as-you-go” law, Congress voted in December to waive the law. According to the CBO, without that waiver, Medicare would have been cut by $25 billion, and other vital government programs by an additional $115 billion.

But at some point, Medicare cuts are likely. The corporate tax cut is permanent—and very costly. In December, House Speaker Paul Ryan (R-WI) said in a radio interview, “We’re going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit.” Ryan added, “I think the President is understanding choice and competition works everywhere, especially in Medicare.”

This doesn’t surprise Alen Ritchie, a retired California teacher who has worked 50 years in tax service. “A whole lot less money is going into government coffers, and we’re going to have to make it up somewhere,” he observes. “One thing that could be cut, and it’s been talked about already, is Social Security and Medicare. I see that happening in the short term. Hopefully I’m wrong.”

Hello, Sunshine!

The new tax bill makes some states less affordable in retirement. Here are a couple of the states that come out ahead:

Florida: It’s no surprise that this state ranked number-one for retirees in affordability in a recent WalletHub analysis. The state has no income tax and provides its seniors with a hefty discount on property taxes.

South Dakota: No beaches here, but South Dakota is very affordable. Like Florida, the state doesn’t have an income tax. The Motley Fool points out that it also has one of the largest over-65 employment rates.

Alaska: Yes, Alaska! Property taxes are higher here, but the state discounts them for aging adults and it also sends annual check to every resident from the state’s oil savings account. And, like Florida and South Dakota (and Nevada, New Hampshire, Tennessee, Texas, Washington, and Wyoming), Alaska doesn’t have an individual income tax, which means your Social Security and pension is all yours.