Tax Reform – Small Businesses and Families to Benefit?

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Are you for or against the tax bill?  From a middle of the road perspective, there’s some good and bad for all tax paying classes in America.  Kind of like salt and pepper.  Gotta have some good with the bad.

Ultimately, there’s some really great stuff for business owners and families and that means there’s a few things to be Thankful for – especially since it’s the Holiday Season while I’m writing this.

Married? You’re getting a $24,000 Tax Deduction Right Off The Top

Arguably one of the biggest benefits for most Americans is the increase in the standard deduction from $12,000 to $24,000.  Depending on your income level and the amount of deductions you had in prior years, for most folks this is an improvement to their tax situation.  The vast majority of American tax payers wouldn’t be able to itemize their deductions for more than $24,000 – even with the mortgage interest deduction, student loans, and other common itemized deductions.

Thankfully, this change is not only likely to make your tax return a little nicer, but it should simplify your filing process dramatically if you have a W-2 income and no other business or rental properties.  In years past, you likely flipped a coin to decide whether you were going to simply take the standard deduction or itemize.  But now, lots of folks are going to simply push the “Easy Button” on their tax preparation and fly right through. That’s going to take your audit risk way down too if you fall in the w-2 income only category.

Single individuals will now have virtually two times their prior deduction as well – with their new deduction coming in at $12,000 compared to $6,350 in prior years.

This benefit will be short lived however in that it ends in 2025.  By then, let’s hope the “trickle down effect” that the Republican’s are planning for is actually working by then so that the law making bodies decide to make this new standard deduction more permanent.

Child tax credit doubles

If you’ve got kiddos you’re responsible for, then you’ll like hearing that as long as the President doesn’t Veto the bill, you’ll be getting an extra $1000 in your pocket for each of your children you can claim on your tax return until at least 2025.  That’s double what you were able to get for kids in 2017 and prior.  So good for you for having kids and taking on the important but daunting task of being a respectable parent.

Tax break for Small Businesses

If you own a business that files their taxes as a sole proprietor, LLC, or S-Corp, or would otherwise have income that would be considered “pass-through” income from your company, you can count on a 20% tax break on your income that prior to 2018 would have been fully taxable.

Now, I’ve got to check with my CPA on this to be sure, but here’s how I understand the new rule benefits the hard-working, risk taking members of our community that employ a healthy percentage of our communities.

Let’s say you run a business and generate a net profit of $100,000 from the operation of your enterprise.  Under the 2017 tax code, the full $100,000 of net income would be considered taxable pass-through income on your personal tax return. One benefit of the 2018 tax code, if passed, would be that you will get a 20% tax deduction on that pass through income.  So in effect, you would only have a taxable income of $80,000.

What that means to you, is that if you’re in the 25% tax bracket, you would essentially be required to pay $5000 LESS in taxes in 2018 on the exact same amount of net income from your business.  That’s just a little more than chump change.  I get it.  But every little bit counts right?

If you are able to max out the limit by being married, filing a joint tax return, and a successful business owner, then you’d get to do this same math equation on up to $315,000 in net income.  Pretty cool huh?  At that rate, you would have just saved approximately $15,750 in taxes based again on a 25% tax rate.

Thank you very much Mr. President.

Winners and Losers

Please understand that there’s lots of implications of this bill, good and bad, that will have consequences for everyone.  Be sure to talk to a qualified tax professional about your personal situation before deciding how much you actually like or dislike the new bill.  It’s still too early to tell, since as of today the bill isn’t quite a law, but if it does become so then we’ll face things head on – together.  Ask us for help and we’ll get you connected to our experienced CPA’s who are following the developments here very closely.

In the meantime, enjoy the Holiday Season and get ready for the New Year!  It’s almost time for the fireworks.  Cheers!

P.S. if you’d like a good resource for some more of the highlights of the bill, you can find it here https://www.nytimes.com/2017/12/16/your-money/tax-plan-changes.html

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