the entrepreneur's guide to the new tax bill

New Tax Law

I’m not trying to get political in this post whatsoever (WHATSOEVER), but I will say this about Trump: He did entrepreneurs a major solid with his Tax Cuts and Jobs Act.

As in MAJOR-money-back-in-your-hands type of solid.

More on that in a minute.

First, let’s flashback to 6 years ago when I was preparing more tax returns in a period of 2 months than most people do in a lifetime.

Not my most exciting years.

However, it resulted in a well-versed knowledge of how to navigate the tax world and now I’m sharing all of that with you, breaking down all the changes you’ll see when filing your 2018 tax return.

Will it be beneficial? For your business, most likely. For you as a whole, well…it depends.

But either way, this post is going to break it down so that you know how it will affect your future tax situation and enable you to make a plan so that you can keep the most $$$ in your pockets.

Because, hey, you’ve got empires to build.

WHAT’S CHANGING

PASS-THROUGH DEDUCTION

Listed first for a reason.

For all of you entrepreneurs out there (and yes, that includes you, real estate investors and freelancers), this is one of the most exciting parts of the new tax bill: a chance to have 20% of your profits go tax-free.

Any sole proprietor, LLC, or S Corp[1] with business income will get a deduction calculated as the sum of:

  1. The Lessor of:

    1. Combined Qualified Business Income

      1. Calculated as 20% of the income of the business generated, or

      2. The greater of

        1. 50% of W-2 wages paid out of the business, or

        2. 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately following the acquisition of all qualified property

    2. Or 20% of the excess of taxable income divided by the sum of any net capital gain

  2. The Lessor of:

    1. 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer

    2. Or taxable income less any net capital gain

WHOA.

That’s hella confusing, even for me. If you want a simple example, click here to get a brief breakdown.

PERSONAL EXEMPTIONS

In 2017, you received a $4,050 exemption for each filer and dependent listed on your tax return, meaning you got to deduct this amount from your taxable income. For instance, if you and your husband file jointly and claim your two children as dependents, you would have an exemption of $16,200 (4 x $4,050).

In 2018, this personal exemption is completely eliminated.

However, all is not lost – the new increase in the standard deduction may offset this.

STANDARD DEDUCTION

The standard deduction is also an amount the government allows you to deduct from your taxable income, and it’s seeing a significant increase in 2018, going from $6,350 for singles in 2017 to $12,000 in 2018 and from $12,700 for married couples in 2017 to $24,000 in 2018.

What does this mean?

Let’s say that you are single and earned $50,000 in both 2017 and 2018.  You always take the standard deduction because your itemized deductions (the other option the government allows for items like real estate tax, charitable donations, medical expenses, etc.) are never higher than the standard deduction.

New Standard Deduction Example

In 2017, your taxable income would be $39,600, as calculated below.

New Tax Bill Example

In 2018, your taxable income would be $1,600 less at $38,000.

New Tax Bill Example

However, note that the standard deduction only applies to filers, not dependents. So while in 2017, you would get the personal exemption for all 4 of your family members (you, your husband, and your 2 kids) on top of the lower standard deduction, in 2018, you only get the standard deduction for you & your husband. Here’s the difference:

New Tax Bill Example
New Tax Bill Example

So essentially, the more children you have, the more this impacts your taxes for the worse; however, like all things the government does, it gets more confusing and complex due to a change in the Child Tax Credit.

CHILD TAX CREDIT

The child tax credit is doubling in 2018, going from $1,000 in 2017 to $2,000. Unlike the standard deduction and personal exemption, which are amounts you deduct from your taxable income, the Child Tax Credit is an amount deducted from your tax liability, so it has a bigger impact.

For instance, if you were in the 10% tax bracket, you’d have to get a $10,000 deduction to get the same type of impact as a $1,000 credit. Hence, credits are the power players, ladies. Take as many of them as you can get.

TAX BRACKETS

The rate you are taxed at is getting lowered, too, which means savings directly into your pocket…. except for the lowest bracket, which isn’t seeing a change. The brackets, however, are getting higher thresholds, which means that if you were on the bubble between two brackets in 2017, you’re probably going to be taxed in the lower one in 2018.

Here’s a look at 2017 tax brackets versus 2018.

New 2018 Tax Brackets

HEALTHCARE MANDATE

The healthcare mandate was repealed with the new tax bill, meaning that if you don’t buy health insurance, you won’t be penalized for it anymore.

The question is this: Is this good or bad for our bank accounts?

The proponents for good say that people won’t be required by law to pay a penalty for something they don’t want in the first place. The proponents for bad state that this may cause health insurance costs to spike for those of us who do pay for health insurance.

Again, it’s a game of wait and see, but just be aware that your health insurance costs could be changing within the next couple of years.

WHAT’S STAYING THE SAME

STUDENT LOAN INTEREST DEDUCTION

Good news, lady: you can still deduct your student loan interest in 2018 and going forward. Bullet. Dodged.

HOME $250,000 EXCLUSION

Selling your house? Good news: The $250,000 (single)/$500,000 (married filing jointly) capital gain exclusion is still in existence, meaning any gain the falls into those limits are never taxable.

Remember, this is only applicable on your primary home and you must have lived there at least 2 of the 5 years prior to the sale. So R/E investors, you don’t get this perk. #sorry


As of now, it appears that the new tax bill will be beneficial on our bank accounts in terms of our tax liability. How it effects our economy and the roots that stem from it is anyone’s guess.

If you have questions or you’d like for me to calculate your estimated taxable income or pass-through deduction based on the new rules, feel free to email me at brittandthebenjamins@gmail.com.

[1] Note: Service businesses with owners making over $157,500 (if filing single) or $317,000 (if married filing jointly) will not be granted the 20% deduction.