As you have undoubtedly heard by now, National Economic Director Gary Cohn and Secretary of the Treasury Steve Mnuchin unveiled President Donald Trump’s tax plan yesterday in the White House Press Room.
The plan itself was a single page, consisting of eighteen single sentence bullet points, and was very vague. More details were gleaned from the questions that were asked by the press of Director Cohn and Secretary Mnuchin.
The most striking detail was undoubtedly the plan to lower the tax rate of all pass-through income to fifteen percent (15%), along with the corporate tax cut to 15% that was a centerpiece during the Trump campaign.
Although this particular item helps high income, wealthy individuals more than anyone else (more than 50% of all current “pass-through” income accrues directly to the richest Americans), it could mean that local small business owners can benefit more from tax planning than ever before.
Under the current system, pass-through income is generally taxed at the individual’s ordinary income rate, meaning it can be taxed as high as 39.6%. The current system makes little distinction between the wages a small business owner pays him or herself, and the remaining amounts of income that is passed through; it is all taxed at the same rate, generally speaking.
Under the proposed system, the amount that a small business owner pays herself in wages will still be taxed under the ordinary income tax rate, which may be dropped to a maximum rate of 35%. However, the “pass-through” portion of the income will only be taxed at 15%. This means that by adjusting the amount a taxpayer is deemed to have paid herself in wages, the taxpayer could potentially save 20% of every dollar moved from “wage income” to “pass-through income”. It will also have effects on payroll taxes like the Social Security tax, and the Medicare tax, which are assessed on wage income.
There are currently no set IRS rules that dictate how much a small business owner must pay herself in wages. Under the current system, small business owners must pay themselves “reasonable compensation”, but the determination of reasonableness is determined on a case-by-case basis. This leads to inconsistent results and it can be very difficult for the IRS to enforce or reverse a business owner’s determination.
We at Cardin and Company believe that all small business owners should engage in pro-active tax planning, and if the Trump Tax Plan passes, this will never have been more important. We know the current tax laws, and always stay up to date on the changes and proposals. So give us a call today, to see how we can help you save money every year on your tax bills… especially if the Trump Plan gets passed anytime soon!