The Top 10 Changes to the New Tax Code and How to Utilize Them

There’s been a lot of controversy about the tax code reform…

It’s been one of the most sweeping bills since the 1986 tax reform bill, with significant changes that affect a lot of people—but this time, the benefits are geared towards businesses and entities rather than wage earners.

Good CPA’s will know what is going on, but not everyone will figure out how to utilize these reforms the best.

Afraid that you’re overpaying taxes? Or don’t have a tax strategist who knows every piece of the new tax code and how to make it work in your favor? Start with a Gap Analysis with our team—a free strategy session to determine where you’re at and what you need. Request my Gap Analysis.

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It’s imperative that you as an individual are also informed on these changes—especially number 7, which is a crucial change to be aware of before writing off another business expense!

Let’s look at each of the top 10 highlights, downsides, and strategies to utilize since the new tax reform bill in turn…

1. The corporate tax rate has dropped to a 21% flat corporate tax rate, which is good news for high income earners. But, if you’re under the $50,000 C-Corporate profit range, your tax rate actually went up.

2. The top rate bracket also went down from 39.6% to 37%.

3. The first time this has ever been put into a tax law is the tax deduction that’s applied to your taxable income for business profits. For anything that flows down to your personal return, whether it’s a C-Corp, S-Corp, LLC, even a sole-proprietorship, you will now get a 20% tax deduction off of your taxable income. So, any kind of business with a net profit will get a 20% reduction of that net profit as your taxable income.

4. If you are a sole-proprietorship, all of your net profit is taxable for regular income tax plus 15% self-employment tax. To avoid paying these higher taxes, and also operating at a level where you are much more likely to get audited, you need to get an entity. Especially if you are a high-income earner. And, you will need to strategize your profits versus wages.

Let’s say you have an S-Corp with a net profit of $100,000, and you pay yourself $50,000 in a W-2 and $50,000 as a net profit. As a result, the 20% net profit deduction you will get is only attached to that $50,000 net profit. So your tax strategist needs to figure out the best percentage to take as a wage versus profit—naturally, you want to pay yourself as little of a wage as possible and have the highest profit as possible.

5. There are two parts of the new tax code that are not such good news, especially to higher income individuals. The first is the limitation on the mortgage interest deduction. If you own a home, your mortgage deduction is now limited to a home value of $750,000. If your home is over that limit, that remaining amount is nondeductible.

6. The second is the limitation on the property and income tax. On your Schedule A, for your primary residence and regular job, whatever state income tax and property tax you paid, you can now only deduct $10,000 a year.

However, if you have a rental property, there is no limitation to mortgage interest and property tax write-offs.

7. Another change that is important to be aware of is the significant limitation on entertainment deductions. You can only deduct the meal portion, and not any further entertainment. This includes any entertainment including sports games, golfing, etc. The way to combat this is to think about changing what you are doing to fit the tax code, so that it will become deductible.

8. AMT tax now won’t affect most people making under a million dollars.

9. The value of what you can transfer upon your death in an estate has been doubled to 10 million dollars, indexed for inflation.

10. In about 30 days, there should be some final regulations around these questions—all of the final regulations aren’t out yet. So, use caution when researching online and make sure that it is up to date. And check back with Live Out Loud in the coming weeks to find out the final regulations!

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