Tuesday, December 19, 2017

How Middle-Class Entrepreneurs And Investors Lose In The End With The Republican Tax Plan

The GOP's tax bill is on the verge of becoming the law of the land.  It may do so as early as next week.  I suspect most people, like me, are scrambling to figure out exactly where we fit under this tax plan.  There's just so much to digest.  On the one hand, most of us are typical working Americans, employees relying on our wages to sustain our individual or family's living standards.  Still a smaller percentage of us make some or most of our "income" from passive cashflow producing investments.  The tax plan clearly affects traditional working Americans the most.

If you want an "at-a-glance" summary of the main provisions within the Republican tax plan, look here.  I'm going to try to translate what some of these provisions mean for you.

1.  Income Tax Rate:  Only 4 brackets now, 12%, 25%, 35%, and 39.6%.  It benefits most people who work for a living, i.e., if you don't invest or run a personal business.  I'm a combination employee/business owner so if my logic is correct, my marginal tax rate would start at 25% (because I'm married and gross more than $90K) and be worked down from there to a lower "effective" tax rate because of my non-personal residence real estate deductions and side-business as an author/blogger.

**Correction:  NPR reports it's back to 7 tax brackets.  This shows the latest changes prior to House approval today.

Tax Brackets Under The Proposed Plan


chart showing different tax brackets for singles


chart showing different tax brackets for married filing jointly
Source: NPR 12/15/2017

2.  Standard Deduction Nearly Doubles:  This is great for most Americans, especially if you rent instead of own a home.  Now you'll have just as much as a deduction as a homeowner.  It's a neutral move for most homeowners since you were only really able to deduct a portion of your entire mortgage interest from your personal income taxes anyways (though maybe you erroneously believed you could deduct all of it?).

3.  Mortgage Interest Deduction Limit:  This provision is "bad" for cash plush investors (wealthy folks) who were thinking of buying a multi-million dollar home for personal use or even as an investment (think an apartment-complex in New York City).  It's neutral for little guys like us.

4.  Eliminates the Deduction for State and Local Income Taxes:  This one sucks balls for us in states that tax.  Now we can't deduct the taxes from our State Tax return on our Federal return.  I totally get that it's a plus for lowering our National debt (the government not needing to give us a tax credit on our state taxes) but I'm not thrilled, living in CA, a high tax state.  Nevadans and all others...no change for you.  Also, if you are paying more than $10K on your property taxes, guess what?  Now you can't deduct more than $10K on your State return.  That's the new cap.  My property taxes are around $7,000 so I still have some wiggle room should my property appreciate more in the next few years and my Tax Assessor levy more taxes on my property.

Skipping the provisions on personal exemptions and keeping this post focused on the effects on investing and entrepreneurship, we come to...

5.  Business Taxes:  This provision is great for all "business" owners.  It's really what the Trumps of this world, and Republicans who are pro-business, were fighting for.  The Republican theme has always been: lowering taxes on corporations will spur the economy, increase our GDP, and help the middle class as a result.  They claim it will be great for job creation, and for wages since companies will repatriate more of their offshore cash and have more in their coffers to pay their employees.

Of course the Democrats say the complete opposite.  And for them, this tax bill is a total scam, will increase our national deficit, and hurt middle class folks (as well as those on the brink of poverty).  Remember, many Americans don't own a business and aren't entrepreneurial so this provision won't benefit them at all. 

My Take On the Business Taxes Provision

Okay first, if you're not an entrepreneur and own a business of any type, most of this is not relevant to you.  It is something to pay attention to if you invest in the stock market, duh!  Anyone with a brain knows this provision is written to keep the stock market's already historic bull run, going further into the future.  So wise up and stay in the market because lowering corporate taxes is a clear buy or hold signal.  Only a Black Swan event (like war) will bring this party to an end in 2018.

If you're an entrepreneur with an LLC, a partnership, sole proprietorship, or an S-corp, this provision will benefit you.  You see, your small business income is currently taxed at your individual income tax rate, and for many of you, that rate is 35%.  Now, a "pass-through" entity like yours will be taxed at 25%.  That's a significant savings for you, and you should be somewhat thankful.  See why you shouldn't be eternally thankful to the Republicans in the next paragraph.  Meanwhile, Corporations or C-corps will be taxed at 21% forever!  Trump's lovin' it!

The Jig Is Up

While most of us middle class Americans will benefit in the short term from this tax plan, the benefits are ephemeral.  You see, those slick Republicans slapped on an expiration date on our tax cuts.  By 2025, all of these middle class favorable provisions, like the 25% tax rate on pass-through business (which most of us here own), will disappear.  Ultimately, the business tax provision will only favor Big business, and everything else will revert to normal for the entrepreneur.  The perks going away in 8 years is sooooo NOT COOL, MAN!

Whoever has control of Congress in 2025 will be severely pressured to extend those tax cuts for the middle class beyond their expiration.  We better be ready to vote people in who promise to extend these cuts!  Word up, yo!  I AM OUT.

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