On Wednesday, April 26, 2017, Treasury Secretary Steven Mnuchin and National Economic Council director Gary Cohn announced President Trump’s latest tax plan that proposes to cut corporate taxes and lower personal tax rates.
For anybody who has ever made money, you know that paying tax on your income is one of your largest ongoing lifetime expenses. A progressive tax system that taxed my income at a Federal + State marginal rate of over 50% during the Obama years was one of the catalysts for negotiating my severance and leaving the workforce for good in 2012. It didn’t feel worthwhile anymore to work 60-70 hours a week and go through so much stress for the privilege of paying the government more than I kept.
What’s even more amazing is that the vast majority of Americans save LESS than their effective tax rate! Can you imagine being taxed at a 20% effective rate when you can only save 6% of your after tax income? No wonder why so many people can’t escape the Matrix. There are government officials who are laughing behind closed doors at the masses for saving so little and paying so much to the government.
Trump’s Tax Plan
The irony of higher taxes is that it has empowered me and numerous other people to question the unhealthy desire for prestige and money and to retire early. Too many people are killing themselves at jobs they don’t like just to be able to tell people they don’t care about how powerful and rich they are.
Hello folks. Nobody cares if you are the Vice President of a fast food chain that helps contribute to the obesity of America. Nobody cares if you are the Head of Growth for a credit card lead generator that enslaves millions of Americans with 15% – 30% revolving lines of credit. Definitely nobody cares if you are the Head Of PR for a company whose founder lies, cheats, and mistreats women.
I can unequivocally say these past five years of not working for Corporate America have been the happiest times of my life. Now I can even join people in voting on legislation to raise taxes on other people without having to pay more taxes myself! I haven’t yet, but how groovy is that?
With the revealing of the Trump tax proposals and their lower tax rates, however, I am fearful of being incentivized to actually find a job again after five years of early retirement!
Unfortunately, President Trump isn’t really cutting income taxes for the majority of people, only the rich. However, another cohort benefiting the most from Trump’s tax proposals is the large and small business owners of America. That’s me: small business owner! And it can be any of you too, if you take my advice.
The Best Parts About Trump’s Tax Plan
While details on Trump’s tax plan are still sparse, based on the White House briefing, in order of awesomeness, here are the best parts:
1) Corporate tax rate of 15%: This is a MASSIVE cut from the current federal statutory rate of 35%. For profitable, publicly traded companies, they will see their retained earnings go up, their P/E valuations go down, and their share prices go up to trade in-line with historical averages. Stock market investors should benefit.
2) Allows pass-through rate for business owners: Instead of self-owned businesses being taxed at the personal income rate, business owners would have incomes from operations taxed at the 15% rate. Therefore, any individual making more than $37,650 in small business pass through income should see a 10% – 24.6% tax break ((39.6% – 25% current personal marginal income tax rate) – 15% proposal)!
3) Eliminate the estate tax: This would eliminate a tax on assets being transferred via a will after someone dies. Currently, any wealth you leave as an individual above $5.49M will get taxed at the highest federal and marginal tax rate. The number is double for married couples.
4) Repeal 3.8% tax on net investment income: With this repeal, no longer do you have to pay a 3.8% tax if you are an individual making over $200,000 or a married couple making over $250,000. I’ve always believed that $200,000 – $250,000 a year in annual household income is the sweet spot for maximum happiness, partly due to additional taxes when incomes breach these levels. Now Americans would be free to earn a little more without having to pay a penalty.
5) Double the standard individual tax deduction: This would allow individual filers to deduct their first $12,700 in income from their taxes and $24,000 (almost double) for joint filers, as opposed to the current $6,350 for individuals and $12,700 for joint filers. This would be a GREAT change for the middle income taxpayers who don’t have itemized deductions greater than the standard deduction amounts.
6) Repeal the alternative minimum tax: Abolishing the AMT would be great for the roughly 5 million tax filers who’ve seen their itemized deductions get eliminated because the government did not include an inflation adjuster when the AMT was first introduced in 1969. Instead of making sure only wealthier earners paid taxes, the AMT unintentionally ensnared millions of ordinary taxpayers.
7) A slight adjustment to individual tax rates: The top federal marginal tax rate would be cut from 39.6% down to 35%, which only helps the 1%. Meanwhile, there would be a 25% and a 10% tax bracket for a total of three federal tax brackets, down from seven brackets. Here’s where people living in expensive cities making roughly $112,500 – $190,150 a year need to pay attention. This is because if you go from paying a 28% marginal federal tax rate to 35%, there’s a chance this actually may be a tax hike.
8) A one-time repatriation tax holiday or cut: There are billions of dollars sitting overseas because companies like Apple don’t want to repatriate the money because the tax level is too high. If the repatriation tax was lowered, the repatriated money could be used to hire more Americans and build more domestic factories. Even if the money is not used to hire more or build more in America, the money will at least go to stock buybacks and dividend payouts, which is good for shareholders.
Start A Business Already!
I must be one lucky son of a gun because when I left my day job in 2012, I saw a gut-busting ~70% decline in my earnings. All I had was about $78,000 in passive income streams and some money coming in from my online media business to keep me afloat in expensive San Francisco. As a result, I was paying a reasonable 15% marginal Federal Tax rate because most of my passive income is shielded or taxed at a favorable rate.
After five years of hard work, without Trump’s tax reform, for 2017 my S-Corp may be potentially paying the top 39.6% marginal federal income tax bracket. If the 15% corporate rate and pass-through gets approved for all small business owners, then I could conceivable earn a $50,000+ tax windfall every year the tax policy is in place!
Being an entrepreneur is already amazing due to the freedom it allows and the satisfaction gained from creating something from nothing. But to now be able to make the same amount as a W2 employee and pay a 10% – 24.6% lower federal income tax rate is freaking AWESOME!
With the increased cash flow, I plan to hire more freelance workers to grow my business. I’ll add some new features to the website, create new products, produce more content, introduce new multi-media content, and attend more events. By plowing back more money into my business, the business should grow even further and help even more people. How great is that?
If you don’t have a business idea, go from being a full-time employee to a contractor who gets hired back by your employer. Incorporate yourself, and voilà! Less taxes and more freedom to work with multiple clients.
Recommendations To Build Wealth
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Less than 5% of the real estate deals shown gets through the Fundrise funnel
Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Personal Capital sample retirement planner calculator. Are you on track? Click to find out.
Updated for 2019 and beyond.
I’m going to wait to see if it passes before celebrating. But it would be an awesome financial windfall for me too.
One thing I don’t get is the cutting of the tax brackets down to 3. Why? That is hardly the complicated thing about the tax code. And as you said, some middle of the pack people’s taxes will go up!
Hi Sam, thanks for all of the insight into the presidents proposed tax cuts. It will be interesting to see how this all works out. I am happy that I started a LLC in 2017.
I think it is too early to start celebrating or crying (depending upon your position).
As a side note, the proposal to eliminate state tax deductions is literally a double-taxation. Let’s say you make $100k and pay 10% in state taxes and then 30% federal (effective). If you are unable to deduct your state tax, you will give $10k to the government and then your $10k will get taxed again! On top of that, the high-tax rate states, such as NY and CA are already subsidizing the red states with tax subsidies, so this is yet another subsidy. It’s hard for me to imagine that this is not political.
That being said, back to my first point, this is all going to get negotiated anyways and it’s hard to predict what will end up getting finalized, if anything. Currently, they are unable to even bring the healthcare laws to a vote, so I am not contemplating any serious changes in business planning yet.
Hence my thesis: Invest In The Heartland Of America Trend
I read that when you originally released that and agree with that! It’s also why I continue to buy real estate outside of Manhattan.
If this all does go through, hopefully it will encourage people in NYC and CA to leave quicker…particularly, the wealthy!
I refuse to concede that 1 sheet of paper with double spaced bullet points constitutes a plan. It does stimulate debate and get your enemies to disclose their boundary positions while simultaneously hiding what your other hand is doing.
As an owner of a successful CPA practice in San Jose, I’d love it if I and my clients paid less tax. However, taxes are the primary source of revenue for the government, so how are they going to balance the budget if they cut taxes?
The best solution to have a national sales tax and abolish the current tax regime. I wrote my Master’s degree in Taxation thesis paper on this topic. If the government taxes consumption instead of income, their tax revenue would be less volatile and tax collection would be easier to enforce. There is $2 trillion of income in the underground and shadow economy (drug dealers, cash employees, etc.) that goes unreported every year. If the government taxed spending instead of income, those tax evaders would finally start paying their fair share.
-Brian
https://fairtax.org/
This is a tax hike for those living in high state tax states with a large number of dependents who depend on W2 income and cannot convert into flow-through income. In other words, medical doctors, lawyers, engineers, financial workers etc. who live in New York and California and have a family of 2 will get absolutely no benefit from this tax plan. The standard deduction goes up, but the personal exemptions for each dependent goes away and state taxes won’t be deducted.
Those who have the luxury of converting their W2 income into flow-through income will receive a huge windfall and further exaggerate the inequality in our society. Glad you’ll be using the extra money to grow your business, but I have a feeling most will just pocket it and buy another Ferrari or spend 50k on a luxury vacation to the Maldives instead.
This is just excellent – I especially like the part where you say we pay more to the government than we save for ourselves! This is unheard of throughout history and just crazy.
People should at least put a ton in things like 401ks and IRAs to save pre-tax, but that’s beyond the scope of this article.
Small business is truly a great thing – you’re far more in control and you might now end up paying less in taxes. Even if you have a full-time job you should still think about business and if you can incorporate it into your life.
For the lucky few who are statistical outliers in creating and maintaining a small business, you are correct — this will be a beautiful, great tax cut. But most businesses need employees and not everyone in society can be a business owner (by definition). More likely these days, businesses are harder to create as incumbent advantages and inequalities in opportunities grow deeper. Endowing the winners of society with even more rewards while cutting the safety net for the “loser” employees seems nothing more than a cash grab to me. For those who believe in the Laffer curve, this is great, but as demonstrated in Kansas the Laffer curve seems concocted to create a “feel good” rationale for an unabashed cash grab.
You’re right – taxes should be lower for everyone, not just small business owners. People who are earning income via their labor are making more than investors who are making multiples of employment/labor income.
…are paying more*
Thank you! Not everyone is cut out to be an entrepreneur. We need to be able to hire people. If the folks we hire are screwed by taxes, they are more likely to be distracted by the vicissitudes of life and less productive while at work. I don’t think I should get all the benefits available because of my LLC; other folks need to do well in the system, too.
I really don’t think people realize how ridiculous it is that the government taxes the average American worker more than the average American worker can save. Folks need to really make this realization and change their financial habits.
Yes, this is truly astonishing. Just 100 years ago this would have been unimaginable in the United States. If you told someone at the turn of the 20th century that one day the US government would take 20% of person’s income — and that states and municipalities would take some of it too — they would probably not believe that such a thing could be possible. We have allowed things to get a bit too far possibly.
There is no way this will pass as proposed, it’s a giant middle finger to high cost of living states, where upper middle class people would get a tax increase due to elimination of itemized deductions while rich people and corporations nationwide get a massive tax cut.
Those states (NY, CA, etc) have a lot of Republican congressman in affluent areas. Those republicans will not vote for extending the middle finger to their constituents, since that would result in losing the next election.
I would love to see this go through and think that maybe when all is said and done parts of it will get put through. There is too much political bickering right now and the opposition party has pretty much said they will fight everything he puts through tooth and nail. We will see with time, but I think that if they do get something through it will be a bastardized and somewhat watered down version of what we see currently.
This article really broke down this news thoroughly…do you know how many Americans will benefit from the new standard deduction? How much $ will that save people?
The higher standard deduction using 24,000 for a joint return will benefit many Americans because something close to 70% of America does not itemize. However, the issue I have is Trump wants to eliminate personal exemptions which is $4,050 per person on the return. That was not mentioned in his address nor has it been mentioned. If the personal exemption holds up along with the standard deduction of $24k, that may very well provide some tax relief for the middle class. Keep in mind that middle class in Columbus,OH is not the same as middle class in SF. By eliminating deductions on state/local/real estate taxes, that would force those who do itemize to have more than 24,000 per year in mortgage interest and charitable deductions alone. That’s a large hurdle for even SF homeowners. Middle class or upper middle class people certainly own homes with 8-10k in real estate taxes and pay 10k in state income tax. My feeling is those making $125-200k and own a nice home in a nice town will get hit hard if this passes. In my world, $125-200k is not wealthy but affluent middle class.
I am betting on the Republicans crashing and burning before passing this insane piece of legislation. Also, there is zero chance that small business owners will only be taxed once at 15% on their profits. That would be the very furthest thing from revenue neutral and I doubt the “true believers” in the Freedom Caucus could swallow that. They killed Paul Ryan’s moronic health care plan and they’re going to kill this piece of crap too. At least there’s still a few Republicans who care more about the greater good than their pocketbooks (dying breed through).
Trump’s tax plan, I must say, is the best thing since sliced bread. IF… business taxes are reduced to a flat rate of 15% for ALL businesses (as Trump claims it would), this will be a huge stimulus to the economy. On a more micro side, this is a great chance for someone to increase their income and reduce their effective tax rate.
If you want to build wealth, a simple formula is to increase your income without increasing your expenses. Start a home based business that you can supplement your income with. If you are only paying 15% tax on the income you generate from your business (while you are paying 25-39.5% on your earned income), your overall effective tax rate on your total income will become less than what you were previously paying on your previous income before you started the business. Again… increase your income by starting a business you can operate in addition to your current job, keep your expenses low, and invest the additional cash flow. This is how you get your ball rolling, and Trump is offering a great tax incentive to do this.
From a macro standpoint, Trump’s business tax cut plan offers and amazing opportunity for ANYONE… including the rich, middle class and even the poor.
What this means for the rich: They will start more businesses, invest more in their current businesses, higher more people, make more money and pay less taxes. This will be major boost to the economy.
What this means for the middle class: This tax break will be a great incentive for people to start their own home based/side business. This will bring in more income to middle class households, increase consumer spending etc… this will also boost the economy.
What this means for the poor: More jobs will be available from the new businesses that were started. More workers means more people paying taxes. In theory, a business tax cut would eventually increase overall tax revenue from more businesses and more jobs springing up.
We haven’t even mentioned the personal income tax bracket changes and tax code simplification that would come along with the plan either. Personally, my income taxes under the new plan would be reduced significantly.
Rest assured, the final version will not have a 15% tax rate on passive income for small businesses based on these replies alone. Keep in mind that all profitable business income gets taxed and the after tax income becomes capital or equity on a balance sheet. Any owner can take tax free distributions on their capital as long as they don’t exceed that capital balance.
The business owner should not pay 15% while his employees could be paying 25-28%. If this passes, I will go out and buy any franchise and pay myself nothing to expose my entire profit to 15%. This comes under the heading of “Too good to be true”.
“If this passes, I will go out and buy any franchise and pay myself nothing to expose my entire profit to 15%.”
I think this is the point…. more people doing just what you said… buying/starting a business, which means more jobs, and more businesses and jobs for the gov’t to tax. Everybody’s happy.
I think you missed the point. He would tax shelter. As others have point out with Kansas, taxpayers just used the lower pass-thru rate to shelter taxes and not increase business formation nor employment. Since no FICA is paid on pass-thru income, it could have a seriously detrimental effect on SS and Medicaid/Medicare funding.
If Trump wasn’t such an insecure man-child with a short attention span, true comprehensive tax reform such as the FairTax could have been presented rather than some slapdash outline generated with just two days notice due to that OpEd from the Laffer Curve groupies in the WSJ.
Anything that lowers overall tax and compliance burden on those that produce jobs and drive the economy is good – and it’s also good when the middle class has jobs. Which, those that produce jobs generally make – a virtuous circle.
And, at some point there is cake.
Let’s go!
Great coverage Sam. This is a win for the American people.
Some argue that this helps lower ‘Big Business’ taxes.
Honestly, this will massively help the ‘little guy’ small business, so I don’t care about that. We need more small businesses to thrive so that so many of us don’t need to sell ourselves to a 9-5 job.
Thanks!
Doing my quick back of the envelope, assuming that the income brackets remain the same as the original proposal and that a taxpayer only takes the state tax deduction, it looks like the break even in CA to the current tax regime is around $375K of income. After that point, it is actually a TAX HIKE! Lower than $375K higher standard deduction ($12.7K to $24K) protects you from not being able to deduct your state taxes.
Given that this is basically just a massive wealth transfer from high tax states to low tax states, I just don’t see how it can go through politically. I’d think the SALT deduction is even harder to pass than mortgage deductibility.
Hi Jon,
At the $375K income level, there’s AMT and because state taxes are an addback item, the state tax deduction wouldn’t change your Federal taxes.
Great post! Do you think, with the proposed tax changes, people should reassess whether Roth contributions make more sense given the lower tax rates? Our political system tends to be pretty cyclical, so even if the tax changes pass, if/when Democrats take control in the future, I’d expect taxes to go up (eventually) in the future. But, who knows? Maybe the tax cuts will be here to stay for good.
Are you making any changes to your stance on Roth IRAs? I completely agree with your previous assessments on the issue, but want to see if this changes anything for you.
Most working class people will not see an income tax decline whatsoever. Only really folks in the 39.6% federal income tax bracket to 35%. As such, I would still not contribute to a Roth IRA and pay taxes up front.
There are so many legal ways to pay less taxes. I’d incorporate, contribute $54,000 pre-tax to a Solo 401k a year and pay 15% corporate tax instead.
Never give up!