As the dust settles, and the GOP Final Tax Plan moves to the desk of President Donald Trump, it is now sitting in the other big stack of bills that are awaiting the signature of the chief executive. Well, it is no longer sitting on his desk since President Trump decided to move it ahead by signing it before Christmas on Friday morning.
So, how does this help the small business owners in the USA? And what types of tax cuts can you actually expect? A lot of the small businesses are organized as pass-through entities. This means that instead of the business having to pay taxes for the revenue generated, the profit or loss is passed to the owner who then reports this as their personal income. These people can see their tax cut two ways like this.
Just for the record, a lot of the people who are into reporting the pass-through income as mentioned above, are not the small-business owners in the traditional sense. But these people are more of the professionals like the accountants, doctors, and lawyers, or are just those wealthy investors.
More On The GOP Final Tax Plan
At first, a lot of people would pay a much lower rate on the income that is taxable. Then the House Republicans had desired to make the income tax flatter by reducing the seven tax brackets and turn it into three. But the new law of the GOP Final Tax Plan would retain the seven brackets. Along with this, it would also preserve the low rates that in many cases would reach up to include a much higher income.
Though, this is not for every case. Those individuals that have a taxable income between $200,000 and $425,000, which is mostly a company that no doubt includes many business owners, would face a rate hike. This rate would increase from 33% to 35%. Moreover, the married couples that usually file together for the taxable income between $400,000 and $417,000 would also have the same hike in the rates.
If the rates have increased, others have reduced as well
But these people do not have to get worked up due to the nominally high rate since the bigger surprise comes when you get enough deductions for the pass-through income. In short, the owners who have the pass-through entities would be able to shave about 20% off their earnings prior to paying the taxes that are on it. That is what the GOP Final Tax Plan is all about. If there is something that is high, you would be compensated in some other place, neutralizing the things.
This deduction that was just mentioned above follows the contours of the Senate proposal where the deduction was initially put at 17%. And then it passed the chamber with a 23% deduction. But this is not so easy, as there are exceptions to this rule.
This is how it went by – At first, the Congress tied the deduction to the investment in the business of one type or another. It is covered by either half of the total wages of the company, which is filled on the W-2 forms for the taxes, or by a formula that takes into account both capital investment and wages. This is when it begins to get much more complicated.
Notably, the maximum deduction permitted under the GOP Final Tax Plan formula is 25% of the total W-2 wages added with 2.5% of the purchase price, or “unadjusted basis,” of all of the company’ “qualified property.” The qualified property here is anything that the business has bought from the market and is still using. The law permits the business owners to factor that part of the property, even if it is a chair in the office or the office building. These would be used in the deductions as long as it can be minimized, but for at least 10 years.
The GOP Final Tax Plan
Now that you know what happened, let us move to the GOP Final Tax Plan where both the chambers of Congress have passed the Republican tax overhaul bill. But this has been done on strictly party-line votes. And this is the very first overhaul of this type in more than approximately 30 years.
This tax overhaul would also affect every corner of the US economy along with everyone in it. Even, if it would have crossed the finish line within just seven weeks since it had been first introduced. Moreover, the GOP Final Tax Plan still inclines densely toward tax cuts for business owners and corporations. But it also restores or expands some of the tax advantages for the people related to the earlier bills passed by the Senate and House.
Furthermore, the individual provisions would be expiring by the end of the year 2025, but for most of the corporate provisions, it would be permanent. Moreover, as mentioned above, the GOP Final Tax Plan holds trillions in the tax cuts, most of these but not all, are offset by the revenue-raising measures.
The bill on the net would raise debts by an estimated $1.46 trillion within a decade, as per the nonpartisan Joint Committee on Taxation. Moreover, the number would also grow higher if a future Congress does not let the individual tax cuts expire after 2025, as per the assumptions of the Republicans.
With all this, here is a quick rundown of 16 critical provisions in the GOP Final Tax Plan.
For Individual Filers
1. Reduces many individual rates: The GOP Final Tax Plan maintains seven tax brackets, but the rates that apply have been altered to 10%, 12%, 22%, 24%, 32%, 35% and 37%.
The rates before this was 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. And the amount of income that would apply to the new rates are:
a. 37% (over $500,000; over $600,000 for couples)
b. 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
c. 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
d. 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
e. 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
f. 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
g. 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
2. Almost doubles the standard deduction:For those who are filing as single, the GOP Final Tax Plan increases it from $6,350 to $12,000 at the moment; while for those who are married couples that are filing together, it increases from $12,700 to $24,000.
The overall effect: The portion of filers who decide to itemize would sharply drop, as the only reason for a person to do this is if their deductions are exceeding their standard deduction.
3. Eliminates personal exemptions: Before you were allowed to claim the $4050 personal exemption for yourself, your spouse, and each of your dependents. And doing this use to lower your taxable income and even your tax burden eventually. But the GOP Final Tax Plan has eliminated this option.
For those families that have three or more kids, that could either mute or negate any tax relief that they may get due to the outcome of the other provisions in the GOP Final Tax Plan.
4. Covers state and local tax deduction: The GOP Final Tax Plan would shield the local and state deductions for any person who itemizes, but it would cover all the amounts that might be deducted at $10,000. Before this plan was executed, the deduction was unlimited for the local and state property taxes along with the sales or income taxes.
In the book, the SALT break has been there for more than a century. Moreover, the original House and Senate GOP bills endeavored to abolish it completely to support in paying for the tax cuts. But this had met with a lot of stiff resistance from lawmakers in high-tax states.
The residents in the enormous majority of provinces across the country demand an average SALT deduction that is below $10,000, as per the Tax Foundation. So for the middle and low-income families who were itemizing because of their SALT deduction, are now prone to take the much higher conventional deduction supporting the GOP Final Tax Plan. This is only and unless their total itemized deductions that also includes the SALT exceed $24,000 if married filing jointly or $12,000 if filing single.
Protecting the break along with a cover is likely to contribute more support to higher income households in high-tax states.
5. Increases child tax credit: The credit talked about here would be doubled to $2,000 for any child who is below the age of 17. Along with this, it would also be accessible to those people who earn higher incomes since the GOP Final Tax Plan would raise the income threshold.
It is under this that the filers might claim the complete credit up to $200,000 for single parents, which was $75,000 before. Also, the filers can claim the full credit up to $400,000 for married couples, which was $110,000 before.
Just like the very first $1,000 of the child tax credit, another $400 of the added $1000 would also be refundable. This means that a middle or low-income family would be able to get this money refunded to them. This is only if these people’s federal income tax liability totals out at zero.
Moreover, along with the added $400 that would be refundable 10 million children from the low-income working families would only get an additional $75 in the advantages under the GOP Final Tax Plan. This is as per the Center on Budget and Policy Priorities estimates.
6. Formulates temporary credit for non-child dependents: This bill would permit the parents to get up to $500 credit for each of their non-child dependent for whom they are sponsoring. This can be a child who is 17 years old or even older than that, an adult child with a disability or even an ailing elderly parent.
7. Reduces cover on mortgage interest deduction: In case you are taking out a new mortgage on a first or second home, you would only be permitted to deduct the interest on the debt up to an amount of $750,000. While before you were allowed to deduct up to $1 million. Moreover, those who are homeowners and already have a mortgage would not be affected by the alterations in the GOP Final Tax Plan.
Also, the GOP Final Tax Plan would not permit the deduction for the interest on the home equity loans as it used to take place before where it was allowed on the loans of up to $100,000.
8. Eliminates mandate to buy health insurance: Now, there would not be a penalty for not purchasing the insurance like it was before. While it was a goal for the Republicans to get rid of it for a long time, this measure now would also assist to offset the cost of the tax bill. Moreover, this act is estimated to save a lot of money since it would minimize the amount that the federal government spends on the insurance subsidies and Medicaid.
The Congressional Budget Office supposes fewer people who are eligible for Medicaid would look for the coverage and would learn that they can sign up for the program and fewer consumers who qualify for the grants would enroll on the Obamacare exchanges. But the policy experts further note that the commission repeal might raise premiums because the people who are more healthy might decide to skip buying insurance.
9. Delays inflation adjustments in the tax code: The GOP Final Tax Plan would be using the “chained CPI” to measure the inflation, which is a much slower method as compared to the one that was used before. And the overall effect of this is that the exemptions, credits, and deductions would become worthless.
This is since the inflation-adjusted dollars defining maximum value and eligibility would grow more slowly. It would also subject a lot more of your income to much higher rates in the coming years as compared to what was there before this bill was passed.
10. Exempts almost everybody from the estate tax: Unlike the House GOP bill, the GOP Final Tax Plan doesn’t call for a reversal of the estate tax. But it substantially cancels it for all except the smallest number of people. This is done by doubling the amount of money excluded from the estate tax.
While before, this was set at $10.98 million for married couples and $5.49 million for individuals. Moreover, at those levels, only 0.2% of all estates had ended up being subject to the estate tax.
11. Protects smaller but popular tax breaks: The earlier version of the GOP Final Tax Plan had recommended abolishing the deductions for classroom supplies bought with the money of the teacher, student loan interest, and medical expenses. Moreover, they also would have canceled the tax-free status of tuition waivers for graduate students.
However, the GOP Final Tax Plan protects all these as they were before. Moreover, it also expands the number of deductions a person can add for the medical expenses for 2018 and 2019.
12. Curbs who’s hit by AMT: The earlier GOP bills requested for the elimination of the Alternative Minimum Tax. The GOP Final Tax Plan kept it, but just reduced the number of filers. These people would be the ones who are hit by it by increasing the income exemption levels. For singles, it would increase from $54,300 to $70,300, while for the married couples, it would increase from $84,500 to $109,400.
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For Business and Corporations
1. Slashes corporate rate: The GOP Final Tax Plan cuts the corporate rate (just for C Corporations) from 35% to 21%, which is higher than the rate of 20% that was there before. The raise was there for freeing some of the revenue up so that the lawmaker’s demands could be accommodated on the other provisions. Further, the bill would also cancel the alternative minimum tax on corporations.
2. Includes rule to prevent abuse of pass-through tax break: In case a partner or owner in the pass-through also draws the salary from the company, this money would be subjected to the ordinary income tax rates. But to restrict the public from recharacterizing their earnings as the profits of the business for obtaining the benefit of the pass-through deduction, the GOP Final Tax Plan will be placing the limits on how much income would be qualified for the deduction.
Nevertheless, the tax experts still feel that these types of anti-abuse measures would still offer the taxpayers with many more opportunities to fool the system. Also, it would openly favor the passive owners of a company over the active businessmen who actually runs things.
3. Reduces tax burden on pass-through businesses::The burden of the tax on the shareholders, partners, and owners of the partnerships, LLCs, and S-corporations, who also pay their share of the taxes on the business through the individual tax returns, would be reduced. It would be lowered with a 20% deduction, which is a bit less as compared to the 23% called for in the Senate-passed bill.
The 20% deduction would be forbidden for those people who are in the service business, only and unless their income that is taxable is less than $157,500 if single, and $315,000 if married.
4. Develop how U.S. multinationals are taxed:: All of the US companies today owe Uncle Sam tax on each and every profit that they gain. This is regardless of the income source or place, as in, it does not matter from where the income has been earned. They are permitted to delay paying U.S. tax on their foreign profits until they bring the money home.
A lot of people argue that the tax system of the entire world puts the American businesses at a great disadvantage. That is because a maximum number of the foreign competitors come from countries with the territorial tax systems. This means that they do not owe tax to their governments on the profits they make offshore.
The GOP Final Tax Plan recommends changing the U.S. to a territorial system. This even includes some anti-abuse provisions so as to prevent the corporations with foreign profits from gaming the system eventually.
But till then, the companies would need to pay the one-time low tax rate on the existing overseas profits. This is an 8% rate on non-cash assets (for example, the equipment abroad in which income was invested), imperceptibly more significant than the rates in the Senate and House passed bills.
Now that you are clear about the GOP Final Tax Plan, what do you think about this? Is the plan beneficial to you? In any matter where you feel that you need some assistance, connect with IncParadise freely to get all the assistance needed for anything.