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
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Updated for 2019 and beyond.