The federal income-tax reform proposal that Congress is in the midst of passing will, in general, modestly reduce the tax burden on older Americans. The effect of tax reform on elderly individuals, however, will vary in much the same way as among the general population, analysts say. Lower-income people and some in upper-income brackets will be helped most. Middle-income older taxpayers, like their younger counterparts, will receive little tax relief and may face slightly higher income taxes.
These results will generally be the same, whether the final tax product is closer to the House-approved measure or to the bill that the Senate was poised to pass late Tuesday.
Although a few provisions in the tax-reform measures are geared especially to those over 65, tax experts say that the effect the final law will have on elderly Americans will depend more on how much income they have and on what assets they hold than on their age.
The final form of the new tax bill will incorporate some measures that would decrease the taxes on elderly Americans, and others that would increase them. According to Dr. Eugene Steuerle, a visiting fellow at the American Enterprise Institute, most of those who do not itemize their deductions would receive a ``modest'' tax decrease. On the other hand, he says, ``The elderly who make substantial use of itemized deductions [generally middle-income taxpayers and some who are affluent] will end up paying more tax.
But according to Peter Scott, a tax policy analyst with the American Association of Retired Persons (AARP), it is unwise to generalize too broadly about elderly Americans, as they constitute ``a very diverse group of people,'' from the impoverished to the affluent.
Nearly 4 million Americans over 65 do not have to pay federal income taxes, as they live below the official poverty line.
Another 10 million of the nation's 28 million elderly have incomes that, while above the poverty line, are still so low that they also do not pay federal taxes. The new bills would let these couples have $2,000 more in annual income without having to pay federal taxes; this would exempt about 750,000 more people from payments to Uncle Sam.
(Social security payments generally are not included in the taxable incomes of the elderly.)
One deduction that many older Americans rely on heavily will remain. When homeowners over 55 sell the houses they live in, there is no federal income tax on their profit. However, this is a once-in-a-lifetime deduction -- taxes must be paid on the profits from the sale of a second and any subsequent homes.
By contrast, a deduction important to an uncounted number of elderly Americans will be substantially decreased. Under present law a taxpayer can deduct from his taxable income the amount of medical expenses paid during the year that exceeded 5 percent of his income. Nearly 11 million Americans of all ages now use that deduction, with elderly taxpayers probably doing so more frequently than others, says AARP's Mr. Scott.
The legislation that now goes into a Senate-House conference would raise the threshold for deducting medical expenses from 5 percent to 9 percent. The change would effectively increase the taxes of an unknown number of elderly Americans -- and taxpayers of all ages -- by reducing that deduction.