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What Sharing Economy Workers Need To Know About The New Tax Bill

When the Tax Cuts and Jobs Act (TCJA) was signed into law last December, the one question on most sharing economy workers’ minds was: “What does the law mean for my taxes?” To help answer that question, we’ve summarized the big changes for you and your business, including:

  • Adjusted tax brackets and lower rates
  • New deduction for pass-through entities
  • New higher standard deduction
  • New cap on mortgage interest and property tax deductions

*Disclaimer: this summary is not legal or tax advice. All individuals are encouraged to consult a tax professional who knows their specific and unique circumstances before making any business decisions.

Adjusted Tax Brackets and Lower Rates

The TCJA didn’t reduce the number of tax brackets as originally thought. We still have 7 tax brackets, but the amount of income each tax bracket accommodates has expanded. Expanded tax brackets mean more income is potentially subject to lower rates of tax. By and large, the expanded tax brackets will lower the tax rate on taxable income for individuals and businesses.

Key Takeaways

The good news is under the new brackets almost everybody will end up paying less in taxes. Income that would normally fall into a higher tax bracket will now fall into a lower tax bracket due to the expanded income ranges for all tax brackets. For example, If you earned $35,000 under the previous tax system, you would have fallen into a 15-percent tax bracket. Under the new legislation, you fall into the 12-percent tax bracket.

Source: What The 2018 Tax Brackets, Standard Deductions And More Look Like Under Tax Reform

New Deduction for Pass-Through Entities

The TCJA changes how pass-through entity income is taxed. Most sharing economy small businesses are set up as sole proprietorships, LLCs, or S-corporations and are treated as pass-through entities for tax purposes. Under the old tax system, business income was taxed at your personal income tax rate, which could be as high as 39.6%. The new law allows most sharing economy businesses to deduct up to 20% of income from taxable income. It should be noted, the 20% deduction is limited to people who make less than $157,000 a year (or $315,000 if they file as a married couple).

Source: What Tax Reform Means For Small Businesses & Pass-Through Entities

Key Takeaways

From a sharing economy small business point of view, this is the gem in the TCJA for us. This is effectively a 20 percent tax cut for sharing economy businesses. So, if your annual business income is $50,000 per year, the IRS would only tax you on $40,000 at your personal income tax rate. The $10,000 is tax-free!

New Higher Standard Deduction

The TCJA eliminates personal exemptions but nearly doubles the standard deduction from its current levels of $6,350 to $12,000 for singles and $12,700 to $24,000 for married couples who file jointly.

Key Takeaways

The chief benefit of the increased standard deduction is one of return preparation time and cost. In the past, it was necessary to itemize everything to claim business - and most personal - deductions. Now with the increased standard deduction, unless your itemized deductions total more than $12,000 filing single or $24,000 married filing jointly, there is no need to itemize to claim the deductions as you did in the past. Not having to itemize should simplify the preparation of your return and reduce your preparation cost when this is outsourced to a tax professional.

Source: What's in the Tax Bill, and how it will affect you.

New cap on mortgage interest and property tax deductions

Before TCJA became law, you could deduct up to $1 million dollars of mortgage interest on multiple homes as well as amounts paid for state and local property taxes on your federal return. Under the TCJA, deductible mortgage interest is now limited to $750,000 on new mortgages taken out after December 15th, 2017. In addition, state and local income deductions are now capped at $10,000 annually.

Key Takeaways

The $10,000 limit on state and local property tax deductions will hurt property owners who live in high property tax regions the most. They will lose a potentially large tax deduction. While the mortgage interest deduction limit has been decreased from $1 million to $750,000, its impact will be less severe than the reduced state and local property tax deduction. This is because the state and local property tax deduction applies to all property regardless of the date of purchase, while the reduced mortgage interest deduction applies only to new properties purchased after December 15th, 2017.

Source: 5 Deductions taxpayers will miss the most

Wrap Up

I have read and reread the TCJA bill and the majority of the provisions favor large businesses (read: corporations). But all is not lost for small business owners. There are a few tax nuggets in this bill for small businesses. As discussed above, these are:

  • Adjusted tax brackets and lower rates
  • New deduction for pass-through entities
  • New higher standard deduction
  • New cap on mortgage interest and property tax deductions

The first two potentially have a direct tax-saving benefit to you and your business. And while the last one won’t equate to a true tax saving, it could potentially translate into reduced tax preparation costs. Saved time is saved money!

Tax law can be complicated and overwhelming when you only deal with it once a year. Contact me today to find out how this new bill will directly impact you and your taxes.

Best, Mark at financialplanningdoneright.com

Email: mark@financialplanningdoneright.com

Phone: 800-622-1045