The Tax Cuts and Jobs Act does represent a relatively significant tax cut for most middle-income retirees, but the bill did nothing to change the interactions between different income sources in retirement, which means that retirees will need to pay close attention to which accounts they withdraw from at which points in time.

To illustrate the interactions between ordinary income, such as IRA withdrawals, Social Security benefits and long-term capital gains, we’ll introduce a fictional couple—John and Jane Smith. Like many middle-income retirees, John and Jane do not have mortgage interest to deduct, and their state and local taxes are not enough by themselves to overcome the standard deduction in either the old system or the new.

John and Jane have $60,000 of combined Social Security income, $15,000 of long-term capital gains from their brokerage accounts and $45,000 of IRA withdrawals.

Their standard deduction under the old system for 2018 would have been $13,000, plus an additional deduction of $2500 because they are both over age 65, plus two personal exemptions of $4,150 each for a total of $23,800 of exemptions and deductions. The new tax system would give them a total standard deduction of $24,000 plus an additional deduction of $2500 because they are both over age 65 for a total deduction of $26,500.

Under the old tax system, if all brackets had been advanced to 2018, John and Jane would pay federal income tax of $9,577. Under the new tax system, the same couple would pay $7,461 in 2018. This represents a 22 percent tax cut for a couple, that in most areas of the country, would be considered upper-middle income.

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