I’m sure you’ve been watching the news wondering how the various tax plans could impact your tax return. Unfortunately, because the details were constantly changing it has been impossible to project potential impact on a specific taxpayer basis.
Now that there are proposals that give some details, we are in the process of trying to determine impact based on specific client tax facts.
However, overall, if either of the plans are implemented, there will not be a tax savings for most middle and upper middle class taxpayers (our firm defines this as making between $75K – $250K per year).
1. Over 95% of businesses are flow through businesses, so lowering the corporate rate to 20% has no impact to 95% of businesses.
2. Flow-through businesses mean the income from the business flows to the individual return and is thus taxed at that individual’s tax rate.
2. Per IRS statistics, over 95% of taxpayers pay 25% or less as their effective tax rate. So making the tax rate 25% for flow through businesses is a ‘non-event’ for most businesses.
3. The following typical middle class deductions are being eliminated
* State and local taxes
* Home office
* Mortgage interest on mortgages over $500K
* Interest on home equity lines
* Exemptions (so number of children and dependents will no longer relevant)
* Student loan interest
4. Although the proposals increase the standard deduction, for most middle class clients this higher deduction is lower than their current itemized deductions plus personal exemptions. Therefore yielding a net loss in deductions on their returns.
Therefore, although we haven’t looked at each specific tax return yet, looking globally at the our firm’s client base, whose incomes are less than $500K, these tax plans will generally not be beneficial to you.
Please look for us to reach out to you again as details become available.