Corporate Tax

How To Save Taxes By Setting Up S-Corp

How to Save Taxes as an S-Corporation

If the individual is self-employed, it is possible to help avoid high Medicare and Social Security taxes to organize the business as some kind of S-corporation. This is because individuals who are not hired by any corporation must pay higher Medicare and Social Security. By organizing the business as some kind of S-corporation, then having higher taxes can be avoided.

The IRS or the Internal Revenue Service can also take a close look at the taxes if this route is chosen as it could also lower the overall tax liability and then generating the similar net income.

Self-Employment Taxes

Whether the individual is an employee or self-employed, they still have to pay Medicare and Social Security taxes to the government. When working for someone else, the individual is only responsible for his share of the taxes and the employer can make the difference by paying the balance off. However, for those who are self-employed, they are expected to pay both the portions of the tax. The combined employer and employee portions of this tax usually amounts to a total of 15.3 percent.

S-Corp Distributions

If the business is organized as some kind of S-corporation, then it is possible to classify some of the incurred income as a salary and some of these as a distribution.  The individual is still liable for the self-employment taxes on the salary portion of the income, but they just have to pay the average income tax on the distribution portion. It also depends on how the income is divided. In doing so, it can save a substantial amount of the self-employment taxes by merely converting this into the S-corporation.

The Risks of Filing the Business as an S-Corporation

The Internal Revenue System or the IRS looks closely at the S-corporation returns because it has more potential to be taken advantage of. Take this situation for example. An entrepreneur who generates an annual income of $500,000 abut only records $20,000 will trigger an inquiry from the IRS because he is obviously avoiding much self-employed taxes. The guiding principle is that the taxpayer must designate an amount that is reasonable to his income. However, this is quite a gray area and if the envelope is pushed too far, then there is more risk for the IRS to do an audit and also start of potential penalties on the interest of the back taxes that the IRS have already addressed.

Additional costs for S-Corporations

The S-Corporation saves the individual from self-employment taxes. It also costs the individual more than he can save. With larger corporations, the S-corporation is some start-up that has accounting and legal costs. There are some states that are expected to pay more taxes and fees. Take for example the S-corporation in California must pay 1.5% on the income and a minimum annual amount of $800. This is not a requirement for sole proprietors.

Difference Between S Corp and LLC

Both the S-corp and the LLC provide the entrepreneur the similar kind of protection. However, the LLC is much simpler than the S-corp. Filing it as LLC can also save the taxpayer a couple of thousand dollars especially on the cost of administration. However, studies show that there is more money saved when incorporating. This Is because of the differential in the Medicare tax.

It is important to note that the profits from the LLC are taxed completely for FICA, which is Medicare and Social Security combined. This means 15.3% of the FICA taxes along with the additional $2.9 Medicare taxes on the profits that are above the wage base.

This is where the difference between the S-profits come in. An S-Corporation is not taxed for FICA. This is the differential in Medicare. Under normal circumstances, full time physicians usually earn more than what they get from the wage base of the Social Security. The tax savings are also generated from the Medicare differential between the non-taxed profits of the S-corps and the fully taxed profits of the LLC.

The catch is when the entrepreneur incorporates then he is both the owner and employee of the corporation. As the corporate owner, the taxpayer hires himself, who is also the employee. The upside is that the LLC is some kind of venue where the taxpayer is both the worker bee and the business owner. Therefore, the business results of the LLC when reported and filed on Schedule C that also includes the individual’s 1040, there is no separate income. This then saves him money.

Receiving Remuneration from S-Corp in Two Ways:

  • As an employee, the taxpayer receives a “fair salary” by the corporation because he is productive.
  • As the owner, the tax payer pays himself a “distribution” of the said profits that remain after every other expenses (including the salary of the tax payer). These profits are also taxable because it is income and not because it is considered as Medicare taxes.

For S-Corp to make sense financially, the individual must have profits that are significant and long lasting even after the salary of the employees have been paid fair and square. How is a fair salary calculated? Here are two ways:

  • The IRS typically does not challenge the “fairness” of the salary if it is not equal to the remaining profits even after paying one’s self.
  • The entrepreneur must also pay a reasonable amount depending on one’s production, location and profession.

The salary being reasonable is constantly scrutinized by the Internal Revenue System. This is because of the owners of S-corp are tempted to earn their remaining profits from the Medicare taxes because all year round, they were only getting miniscule paycheck.

Business owners and self-made entrepreneurs must understand that S corporations can save owners tax when registered as a small business. There is a big benefit for the entrepreneur if they list the business down as an S corporation. The S corporation minimizes the employment taxes.

However, it must be clarified that the S corporation is not really a corporation. Instead, an S corporation is actually a limited liability company that is strictly made for the Subchapter S election.

People including tax accountants regard this as “S corporation.” However, the more proper way of calling it is Subchapter S corporations especially when the entity that is making the election is a “Subchapter S LLC.” It only comes to show that the entity that makes the election is really an LLC.

Here is a more elaborate explanation on how the Subchapter S allows the business owners to save more money:

Avoiding Some Taxes

The S corporation election lets the business owner avoid Medicare, self-employment taxes and Social Security on the portion of the business profits. That is the deal as well as the trick. The tax avoidance gambit also works quite simply despite it being regularly debated by the Congress and also reaffirm the works.

With an S corporation, the entrepreneur splits the business profits into two: “distributive share” and “shareholder wages.” The shareholder wages are subjected to 15.3% tax and the leftover distributive share cannot be subject to 15.3%.

Tax accountants really do not explain this and can be quite sheepish on this particular subject matter. However, for entrepreneurs who wish to avoid Medicare and Social Security taxes along with the self-employment taxes, it is definitely beneficial for them to be listed as an S corporation.

Note that the S corporation also lets the active shareholders to not pay the surtax of 3.8% for Medicare on business profits.

The Deductible Losses for Smaller S Corporations

As mentioned in the previous paragraphs, the saving tax loophole on taxes that is associated with the S corporation passes by S corporations that let the shareholder as well as the employee avoid the employment taxes. This is where entrepreneurs and self-employed individuals must focus on if they wish to make a Subchapter S election for their LLC or their corporation.

However, there are also two smaller general tax benefits that are associated with the S corporation. The first benefit is that the S corporation tends to lose money and that loss eventually becomes a tax deduction on the individual tax return of the shareholder.

There are some rules that the entrepreneur must follow in order to deduct these losses. In summation, the money that is lost must be the money of the beneficiary. They must also be working in the S corporation. This is a good benefit for businesses that experience losses whenever they ramp up.

Another benefit is that the minor tax savings can also flow from the Subchapter S status. An S corporation has a safer tax return that can put deductions. This results to entrepreneurs claiming deductions that are legitimate.

No Corporate Income Tax

Another tax saving benefit that must be delivered by S corporations is a special case and is only applicable to businesses that are operated in the form of regular corporations. These are also regarded as C corporations.

In most situations, S corporation does not pay corporate income tax. This means that when compared side by side with the C corporation, the S corporation can pretty much save the entrepreneur a corporate income tax.

With the examples presented above, it only makes sense that it is definitely fair for the entrepreneur to tax these small business corporations at a 63% tax rate. It is also self-evident that a corporation should be elected and treated as an S corporation. This is because as S corporation, there is no income tax that can be levied. Whenever the income is allocated to the individual shareholders, there is a maximum rate of 44%. This means that it would be around $440,000 in the form of income taxes and then it would be around $600,000 left over right after the tax profit.

Year End Tax Planning for S Corporations

 Businessmen and entrepreneurs work hard on preparing and planning for the upcoming tax season. An area that must be paid significant attention is how to properly plan for the S-Corporation clients. This is because the S-corporation is a designation within the IRS tax code which also changes how corporations are taxed. If the corporation is created within the state law and it is applicable, then it is granted the S Corporation status from the IRS. The business is no longer taxed as a corporation and this is good news for the owner because they receive lower tax rates. In the long run, it transforms into a “flow through” entity and its earnings accumulated from the corporation are eventually taxed at the level of shareholder and listed as is on the 1040 tax return. There are also other entities that is requested and treated as the S Corporation for the taxes whereas the remaining amount is simply for the LLC and its legality.

There are also several aspects that are connected to S corporations and must be specially planned toward the end of the year. When the Congress enacted the statutes of the S-Corporation, there have been lots of quirks and this was created and it primarily affected the S-Corporations. It eventually seemed inconsistent along with the other areas from the tax code. Nonetheless, it requires that this may be properly accounted for.

Salary of the Owner

The profits of partnerships, LLCs and sole proprietorships are subjected to two taxes: self-employment taxes and income taxes. When one of these two is treated as some kind of S-corporation. The residual profits are not subjected to taxes for the self-employed. This can definitely decrease taxes. This is somehow true to a certain degree. Offsetting the tax savings is the very reason why an owner of any S-corporation must pay himself or herself a salary that is within the means to commensurate services that have been provided to corporations. The salary is then subjected to employment taxes. In effect, the portion of the residual profits of corporations are not allocated to salaries subjected to self-employment taxes.

Here’s How Taxes Work for Citizens and Residents Living Abroad

Here’s How Taxes Work for Citizens and Residents Living Abroad

For Americans or legal residents living on tropical islands or traveling, they must consider the possibility of being locked up just in case fate does not favor them. That is why it is very important to pay taxes even when one is overseas so that when something happens, the government can still protect these individuals. Contrary to popular belief, moving out of the States does not relieve the individual of tax obligations. The IRS has the knack of tracking anyone anywhere in the world.

Here are some tips on how citizens and legal residents can manage their taxes and tax liabilities while they are outside in the country and remain within good graces of the government of the United States.

  1. Understand the Foreign Earned Income Exclusion

Resident aliens as well as US citizens are subject to federal income tax when set on the worldwide income. The FEIE or the Foreign Earned Income Exclusion lets the qualified taxpayers exclude the taxable income and reach it to around $101,300 of the earned income that is subject to only two requirements. It is also very important to note that the income the individual receives must be earned because he is working. It may be as an independent contractor or an employee and also not apply to the passive income like dividends, pensions, income and rental income. Independent contractors also receive what they call a 1099-MISC and still be subjected to self-employment tax (Medicare and Social Security) on their net income. Another thing to note is that this can also be optimized simply by opening the S corp and the other potential offshore structures which depend on the individual tax situation of the person.

  1. Understand the requirements of the FEIE

There are two requirements that can be done. First, the individual must establish a “tax home” if they are in a foreign country or in other several countries. Another is that they have to satisfy the “Bonafide Resident Test.”

  1. Have a Fire Sale

The easiest way for an individual to meet the “Tax Home” requirement is to also cut the ties with the United States. This means that the individual has to give up the apartment. To be more elaborate, when the individual has to give up their apartment, cancel their lease or sell their car, all with the documentation that they will leave.

  1. Get Out

The IRS site describes that the hardest process when fulfilling the requirements is the Bona Fide Residence Test, which has already previously been mentioned. This can be done when the individual is a resident of a foreign country for a period that has not been interrupted and includes an entire tax year. This means is that the individual must plant their flag in other countries for a majority of the year. It may not necessarily be advisable to stay in just one country, for example, being confined in a jail cell, but these individuals must prove that they are there in the long run. It is not black and white and some examples that prove residency are:

  • Establishing a temporary home in foreign countries for periods that are no definite. An example is having a lease for the long run and also owning a home there.
  • Physical presence in a foreign country. This means that they have to be residing in the mentioned country.
  • The assumption as well as economic burdens including paying the local taxes
  • Actively participating in communities on a cultural and social level. Citizens and residents must acquire their library cards and gym memberships to prove that they are living there.
  • Marital status and family status – if the residents have spouses or family members in the country they are in, it is easier to file this.
  • Other documentation like local bank account info, driver’s license and health insurance
  1. Physical Presence Test

 For new generation of expats, the physical presence test is more applicable. This includes the digital nomads who usually jump from one country and then to another. According to the IRS website, these individuals must be physically present in a country for 330 days in the course of 12 months. The 330 days do not have to be consecutive. The Physical Presence Test does not really depend on the residence that the individual has established, neither is it about proving the return the United States or the reason and purpose of staying abroad. The Physical Presence test only needs the time that the individual is in that country. The intention, regarding the purpose and nature of the stay abroad are also relevant when determining whether the requirement mentioned in Step 3, “Tax Home”, is met.

The very point of this discussion is that anyone can pick up and also leave any day for that year. They can also travel anywhere in the world and physically work in the countries just on their laptop and then return to the United States after one year. As long as this individual was in the United States for 35 days or even less, as long as this is within the period, they still qualify for what they call the FEIE. They do not have to pay taxes on the very first $101,300 in the total of earned income. This case, the split is also divided on a prorated calculation. Approximately this would amount to $50,000 in 2017 and also $50,000 in 2018 for the year period that has been split between the two calendar tax years.

It is very important to understand the tax implications of a country that the citizens or residents are traveling through or possibly be living in. In general, if they are spending more than 183 days or around half a year in another country, they must file as a fiscal resident of that year. For a person who is perpetually traveling or what they call a digital nomad who is qualified under the Physical Presence Test, then this is not any problem. If the individual plans on taking a bona fide residency somewhere and then it gets tricky.

Countries such as Hong Kong, the Seychelles, Taiwan, Singapore, Panama and Costa Rica have what you call a “territorial tax system.” Only the tax income is generated within the country’s borders. There are also a number of countries that have no income taxation such as Bahamas, Bermuda, Monaco, United Arab Emirates, Cayman Island and Andorra.

The choice becomes whether the individual has to choose a country that is for tax purposes and then just pay the required tax in that country at a low income tax rate. Examples of these countries are Bulgaria, Malta and Portugal or also choose to set the residency up in the country. The resident and citizen can be a permanent resident in various countries, but it still depends on the rules of the locality. There are also some people who split the time between the places such as Colombia and Panama and also claim the residency in Panama because of the more favorable tax treatment. In any event, it is also important to be mindful of thresholds when one becomes a tax resident. The aforementioned 183 days is usually the general rule of thumb and this does not apply to various countries. In these complicated cases, it is quite prudent to also receive the counsel of a CPA or a qualified tax attorney.

  1. Staying Out

If the resident or citizen craves for Jimmy John’s and Costo and actually decides to return for these reasons, it may cost him thousands of dollars. Just like qualifying for the status of a hotel chain or an airline, the rules that comply with the Physical Presence Test are quite strict. To begin with individuals, they must be in other countries for around 330 to 365 days. This does not have to be counted within the calendar year. As long as the individual is in another country for around 330 out of the 365 days, then it can be prorated.

However, there is a different requirement if the individual is in international waters or flying over US airspace. If he or she is visiting the United States and have to give an extra hour because the flight is delayed and if it has been missed, then this will also be counted towards allotting the days. Another scenario is if they leave the West Coast around 11:00 pm that is bound for Europe and also charged additional days because this is still in the jurisdiction of the United States. It is very important that there are buffer days remaining so that the mistake would not be as costly as it would.

How to Pay Zero Taxes to the US with the Foreign Earned Income Exclusion

The IRS has built a time bomb to the FEIE. If residents or citizens fail to submit and file their US returns, then they are audited by the IRS. They won’t be able to take the FEIE as well. Even if they are working abroad and would eventually owe the United States government nothing, it would still result to the individual paying the United States 100% of their income.

The same can be said to those who filed their US returns but are not truthful about their foreign salary because they omit this. The downside to that is the minute the individual is audited, they can lose the FEIE and also pay taxes that is 100% of their salary. The way to go around this is that they have to claim the FEIE or they would lose this entirely.

The most common reason why this happens is that the individual though they only need to report their US income to the United States and the foreign source income to the foreign country that they rare residing. Not reporting your foreign salary to the IRS is a big error that can cost them big time.

The very take-away from this is that the United States require every citizen and resident alien, whether they are in the United States or not, to pay their taxes.

Consequences of not filing US tax returns

Living abroad for a number of Americans and legal residents may seem like an adventure of a lifetime. They are exposed to various experiences and their senses are constantly invigorated by events that are delightful, interesting and unexpected. For most, it is the stuff of dreams. There are also unfortunate individuals. Unfortunately, these dreams can also turn dark quickly especially when they discover that they did not comply with the Internal Revenue Service because they did not file their US income tax.

Every year the United States spends 5 billion dollars simply for enforcement activities. This includes auditing, collections, discovery and prosecutions which pretty much yields around that amount all in additional tax revenue. It is clear that their financial best interest is about to get easier for the US government. They can also assess and prosecute the Americans living abroad and who are behind the filing of the US income taxes.

Just like any US resident, if you are an American residing in any country abroad and fail to file the US or the state taxes, then they will receive penalties for not filing their taxes, even if they do not owe the taxes to the state government or the IRS. The failure to file the penalty can also be thousands of dollars and can also take part in the advantages, benefits and special reductions that are offered to the US expats that can help reduce the US tax obligation. There are also news that have been enacted and provided the United States a crystal clear picture of who among the Americans are living abroad and are also not filing, what they are worth and where they are living. The days of living beyond the grid is waning and a new era of what is focused and enforced. The United States have entered this data by sharing the agreements at a level that is most sovereign and between the five of the largest countries within a swarm of the additional countries that are asked to join into data sharing.

Solar Tax Credit

Solar Energy Tax Credits

Federal Tax Credits of Solar Energy

Tapping the sun to acquire power feels very good. Solar power does not pollute but it reduces the use of fossil fuels and other coal and also reduce the individual carbon footprint. It is also up to five times expensive as electricity that is from natural gas and the other sources.

In order to encourage the Americans to use the solar power, the Department of Energy along with the Environmental Protection Agency run the Energy Star Program which among the other projects also offer the tax credits simply for the solar-powered systems.

Credits for approved solar installations

Installing the alternative energy equipment in one’s home can also qualify them for a credit that can amount to 30% of the total cost. The credit is made available until the end of 2019. The percentage usually steps down every year and then ultimate does so at the end of 2021.

The qualifying equipment also includes the solar-powered units that can generate the heat water or electricity. The credit can be made available for improvements especially when it is to make a residence for the individual. This can also apply to a second residence.

As credit, it is possible to take the amount directly off the tax payment and not make this a deduction from the taxable income. Aside from the cost of the system, there is also no limit to the total dollar amount of the credit.

How to Claim Solar Credits for Rental Property

It is not possible to claim credit simply for installing solar power at the rental properties that the individuals own. The exception is when the taxpayer lives in the house for just some time of the year and also use it as a rental while one is away. When one is needed to reduce the credit for the vacation home, rental and otherwise, also reflect the time that this was not there. If the individual lives there for around three months per year, for example, then the individual can claim 25% from the credit. The system usually costs around $10,000 which is the 30% credit from the $3,000 and can also claim a quarter from that, which is around $750.

Filing Requirements for Solar Credits

When claiming the credit, it is necessary that the individual must file the Form 5695 as well as part of the tax return. This can be calculated on the credit of the form. This is then entered as a result on the 1040.

If the individual ends up with bigger credit than the income tax due, then they cannot use the credit in order to get the money back from Internal Revenue Services. Generally, what they can do is carry the credit over to the following year. Unfortunately, it is not yet clear whether they can carry these unused credits to the years after the solar credit expires.

Residential Renewable Energy Tax Credit

The Consolidated Appropriations Act was signed in December 2015. It also has an expiration date for solar thermal technologies and PV and introduced the gradual step down in the value of the credit for the technologies. The credit that is delegated to the other technologies also expired toward the end of 2016.

Taxpayer can claim the credit of 30% that is considered qualified expenditures for the system that has served as a dwelling unit which is located in the United States. As long as this owned and used as a residence for a taxpayer, then this is what counts. The expenditures in relation to the equipment can also be treated and made the minute the installation of these solar panels are completed and finished. When the installation is set at the new home, then the date that is placed in the service of the occupancy from the homeowner. The expenditures also include the labor costs for every on-site preparation that is in the assembly of the installation of an original system. Preparing and wiring of an interconnected system to a home can also receive deductions from the federal tax.

Solar-Electric Property

  • 30% of the systems have been placed by December 31, 2019
  • 22% of the systems have been placed in service by December 31, 2021 and before January 1, 2022
  • Systems can also be placed in service between January 1, 2006 and December 31, 2021
  • The home that is served by the system does not have to be the principal residence of the taxpayer
  • 26% for the systems that have been placed in the service between December 31, 2019 and Janaury 1, 2021
  • There is also a maximum credit for the systems that is placed in service after 2008

Solar-Water Heating Property

  • 30% for systems have been placed in service by December 31, 2019
  • 22% for the systems have been placed in the service between December 31, 2020 and January 1, 2022
  • Systems are also placed in service between January 1, 2006 and December 31, 2021
  • Half the energy that has been used to heat the dwelling’s water ideally must come from solar and the solar water-heating property expenditures to make it eligible
  • The home is served by the system and it does not have to be the principal residence of the taxpayer
  • The tax credit does not also apply to the solar water heating property for hot tubs or swimming pool
  • Equipment must be certified for performance and pass the SRCC or the Solar Rating Certification Corporation or any comparable entity that has been endorsed by the government of the corresponding state where this property has been installed
  • There is no maximum credit for the systems that have been placed in service after the year 2008.
  • 26% for systems are placed in service that are between December 31, 2019 and January 1, 2021

 Fuel cell property

 The maximum credit is $500 for every half kilowatt

  • The fuel cell can also have a nameplate capacity at least 0.5 kW of electricity that uses an electrochemical process and the electricity-only generation efficiency is more than 30%.
  • The home served by the system must also be the principal residence of the taxpayer
  • If ever it is a joint occupancy, the most maximizing costs that can be taken into account by every occupant is $1,667 for every 0.5 kW. This does not necessarily apply to the married individuals who filed as joint. The credit can also be claimed for every individual that is proportional to the over-all costs that have been paid.
  • Systems must be put in service between January 1, 2006 and December 31, 2016
  • For the systems that have been installed in 2017, these are all considered not eligible

 Small wind-energy property

  • For the systems that have been installed in 2017, these are not eligible
  • Systems can also be placed in service between January 1, 2009 and December 31, 2016
  • There is no maximum credit that is placed for the systems after the year 2008
  • The home served by the system also does not necessarily have to be the principal residence of the taxpayer

Geothermal heat pumps

  • For systems that have been installed in 2017, these are not eligible.
  • Systems must also be placed in service between January 1 2008 and December 31, 2016
  • The home that is served by the system does not necessarily have to be the principal residence of the taxpayer
  • The geothermal heat pump can also meet the Federal Energy Star criteria
  • There is also no maximum credit for the systems that have been placed in service after the year 2008

Significantly, the American Recovery and Reinvestment Act of 2009 also repealed the previous limitation on using the credit for eligible projects that are supported by the “subsidized energy financing.” For projects that have been placed in service after December 31, 2008, then the limitation no longer applies.

Established by the Energy Policy Act of 2005, the FTC or federal tax credit for the reoprty ‘s residential energy initially started to work with solar-electric systems, fuel cells and solar water heating systems. The Energy Improvement and Extension Act of 2008 also extended the tax credit of the small wind-energy systems along with the geothermal heat pumps. This was made effective January 1, 2008. Other key revisions include the eight-year extension of credit until December 31, 2016. The ability to take advantage of the credit and set this alongside the alternative minimum tax. This also includes the removal of the $2,000 credit limit that is targeted solely for the solar-electric systems that started in 2009. The credit has also been further enhanced in February 2009 as conducted by the American Recovery and Reinvestment Act of 2009. This removed the maximum credit amount all on eligible technologies with the exception of fuel cells that have been placed pretty much in service after 2008.

Guide on How to Receive the 30% Credit from Solar Energy

The Solar Tax Credit is the Law that has been extended by legislature in December 2015 and it lets the taxpayer take the 30% credit, as long as it is a qualified expenditure for the solar system. This is considered qualified if it serves as a dwelling unit that is located in the US and is owned and also used as a home by the active taxpayer.

The expenditures in relation to the equipment are made when the installation has been completed. The eligible expenditure also covers the labor costs for preparation made on site, piping and wiring the interconnection of the system to the home and the installation of the original system. In a nutshell, this means that the entire value of the quote from this solar company can install the solar panels that are eligible for the tax credit.

To claim the 30% tax credit from solar energy, individuals must complete the Form 5695 and then add the results to the main tax return.

Here are steps on how to complete the Form 5695:

Form 5695 calculates the tax credits for various qualified residential energy improvements. You just need to worry about Line 1 for solar electricity. Also insert the total cost for the solar panel systems that include the installation listed into Line 1.

Assuming that the taxpayer is not receiving the tax credit for the fuel cells that have been installed on the property, then they do not carry forward the credits that have been accumulated form last year. If this is the case, the value from Line 6 is then put on Line 13.

The next step is to calculate if the taxpayer has enough tax liability to acquire the whole 30% credit that can be received for the year.

The worksheet on Page 4 of Form 5695 must then be calculated to come up with the limit on the tax credits that can be claimed. If they are claiming tax credits for interest on mortgage, buying a plug-in hybrid or electric vehicle, buying the home for the first time or adoption expenses, then there should be more information at hand.

  1. Enter the amount on Line 47 from Form 1040 or Line 45 from Form 1040.
    2. Enter the overall amount, if there are, of the credits from Lines 48 until 51 on Form 1040 and Line 22 on Schedule 4 or Lines 46 to 48 from Form 1040NR.
    3. Enter the amount om Line 40 from Form 5694.
    4. Enter the amount on Line 11 or Line 12 if the individual is claiming child tax credit.
    5. Enter the amount on Line 9 from Form 8396.
    6. Enter the amount on Line 16 from Form 8396.
    7. Enter the amount on Line 3 from Form 8859.
    8. Enter the amount on Line 15 from Form 8910.
    9. Enter the amount on Line 23 from Form 8936.
    10. Add the lines 2 to 9.
    11. Subtract Line 10 from Line 1. Enter the amount on Line 14 from Form 5695 as well. If it is zero or less, then just enter 0 on Lines 14 and 15 of Form 5695.
    12. Enter the result on Line 14 from Form 5695 and then review Lines 13 and 14 and put the smaller one among the two on Line 15.
    13. Add the Lines 6, 11 an 12.

This is hwo you come up with the Federal Tax Credit for Solar Energy.

Deduct These Start Business Expenses

Whenever individual start a brand new business that requires money, it can be difficult for them to shell out their cash. Luckily, it is possible for the entrepreneur to receive cost deductions in order to limit tax bills. Here are ways on how these entrepreneurs can decrease the taxes that they have to pay.

What Entrepreneurs Can Write Off

Once the business opens and starts making money, the costs of items can be deducted and filed as business expenses. These business start-up costs are considered capital expenses. These are the costs that the individual can incur and regard as an asset of the business which will also benefit him or her for more than a year.

Typically, it is not possible to deduct the expenses until the entrepreneur sells or disposes the business in the long run. There is a special tax rule that lets the owners deduct $5,000 in the start-up as long as the expenses that have been incurred in the first year of the business. It is possible to then deduct the rest if there are any. Other equal amounts over the course of the next 15 years can also be deducted.

Some Startup Costs That Can Be Written Off

The business deductions for the next company can also include the costs of:

  • Licenses, permits and other fees
  • Advertising costs, which also include advertising the business opening and also creating websites for the business
  • Rental of the business equipment like office supplies and customers
  • Expenses connected to obtaining suppliers, financing, distributors and customers
  • Accounting and legal fees
  • Investigating costs and what it takes to create a business that is successful which also includes the research on potential products and markets
  • Office rent and utilities that have been paid before the business starts operation
  • Costs for training employees before the business opens

 Can a Small Business Deduct the Cost of the Computer?

 If the individual buys the computer for the business and this is exclusively used for it, then it is possible to list this as a deductible. If the computer is used for business more than 50% of the time, it is definitely a qualified deductible.

However, personal time still has to be accounted. Take this situation for example. If the $1,000 computer is used for 60% of the time, then $600 can be deducted.

Are There Up Exceptions to Start Up the Cost Deduction

Some costs that are related to opening the business that is not considered as a start-up expense. Many of these costs can still be deductible and different restrictions and rules can be applied.


The largest expense that a number of home business can incur is that the business starts the inventory. Buying the goods or materials to make the goods to sell to the customers are also considered expenses.

Long Term Assets

These are items that can be bought for the business and will also last for more than a year. This definitely includes office equipment, computers, cars and machinery. The long term assets that the tax owner can buy before the business officially opens are not considered qualified for the startup costs.

Instead, what can be done is to treat these items that have been purchased as some kind of long-term assets that can be bought after the business begins. It must either depreciate the item in a span of several years or deduct the cost in just one year as it is listed under Section 179. It is not possible to take the depreciation of the Section 179 that is deducted until after the business has begun.

Research and Development Costs

The tax law can also include the special category for development and research expenses. There are also costs of the business that has been incurred in order to discover something new in the experimental sense. This could be a new formula, process, prototype, invention.

These costs also include the computer and laboratory supplies, rent, overhead expenses, equipment rental and utilities. It does not cost the purchasing of the long-term assets. These R&D costs are then deductible as listed in the Section 174 of the Internal Revenue Code. This can also be applied if the business owner incurs the costs even before the business opens.

Organizational Costs

Costs that are incurred to form the limited liability company, partnership or corporation can then technically be part of the startup costs. The rule for deducting the costs can be the same for any startup expense. However, if you form an LLC with one-member then there is no business deductions for the start-up that can even exceed over $5,000.

When Can Business Startup Costs Be Deducted?

Expenses that were listed as startup expenses before the business can also become deductible as soon as the business starts operation. For example, the supplies that have been purchased after the business can start and currently be deducted in operating the expenses. The supplies that you bought before the business starts as additional expense.

When Does A New Business Begin For Tax Purposes

According to the court, a new business begins paying the tax when it starts to function as a pressing concern. IT can also start performing the activities for which it was organized. Also according to the IRS, the venture is a concern once it has acquired the assets that are necessary to perform the intended functions. It can also put the assets to work. The business begins when this business is started, whether they are actually earning money.

For example, if the business has provided a service to clients or customers, it also includes consulting, law services, accounting, financial planning. The business can also begin when the taxpayer offers the services to the public.

For knowledge workers, the business starts once assets are accumulated and the products are sold. These kinds of workers can also include artists, computer programmers and writers.

These products do not have to be completed nor do the sales must be solicited. An investor’s business can also begin when the inventor starts working on an invention. It also does not matter when it is sold, patented or even completed. The writer’s business can also begin when the writer starts coming up with a writing project.

What happened to expenses incurred early on?

Expenses incurred before the business opened can be deducted in the period of 180 months as opposed to doing this all at once because the business would be operating. Typical costs also include the investigation of whether the business should be opened, supplies must be ordered and employees are trained.

When a new business is investigated, it can be quite an expensive proposition. However, these expenses cannot be deducted under the general rules that are made for the business deductions. This is because these expenses simply exist for business or trade and can only be deducted as such. By definition, this can also be incurred for the startup expenses prior to the time that the business has begun.

How fortunate it is that there are ways to go around this dilemma. If the expenditures can result to the up and running business, then they can deduct the part of the costs in the first year and also amortize the remaining costs that can be deducted in the equal installment through the period of 180 months. It begins in the first month that the business has officially opened.

How much can be deducted during the first year of the business. One if then able to deduct this for $5,000 if the qualifying start-up costs can also be the reason to deduct on the phase when the expenses are reached. If the start-up efforts can also end in the creation of the active business or trade. The tax return for the year of the business commences, then the total amount of expenses can also be deducted, as long as one is less than the other.

What Costs Don’t Qualify

The investigation also expenses that these are qualified in relating both the business condition that are general and also relate to specific businesses. The market and product research can also be determined in making it feasible and also starting a specific kind of business. The costs of checking these various factors are involved in the selection that can be amortized and investigated. Aside from that, the costs of creating the business can also include wages, salaries, advertising, consultant and professional fees.

What Costs Don’t Qualify

The following costs do not really qualify for the deduction of the first year. The incorporation expenses cannot also be deducted as the startup costs. However, they can also be deducted in incorporation expenses. The start up expenditures of the real estate taxes, interest, experimental costs and research are also allowed as some kind of tax deduction. This may also be incurred.

The costs are also attributable to acquisition of the specific property that can be subject to the cost recovery and depreciation that do not qualify for the amortization. Instead the property cannot be depreciated under specific rules.

What if the business does not open?

If the entrepreneur chooses to not push through with the business, then he can opt to not pay the portion of the costs. It pays to generally investigate various possibilities of going through the business and to also purchase the non-specific business that still exists. It also considers what are regarded the deductible and personal costs. However the total costs can also pay in attempt to purchase or start specific kind that could also be considered in the capital expense and then claim this as capital loss. This is also subject to the rules that are applied to the non-business capital losses.

If they purchased the business assets in the process of the corporation opening, then the entrepreneur can also claim a loss once this is sold or disposed.

Start Up Costs for Partnerships

If the business decides to conduct it as some kind of partnership, then any of the partners can deduct the expenses that are paid to start and open the business. However, the partnership can also elect to amortize and deduct the over-all start up costs. Under the same rules, this is a sole proprietorship, except the election cannot be done with a partnership and then eventually reported to one of the partners.

If you also decide that the partnership cannot be considered for this election, then the organizational cost can be added to the tax basis of the interest of the partnership. If that is the case, the partnership interest is eventually sold and dissolved so that the capital expenses are then reduced to the amount of the capital loss and gain.

Calculating the Start Up Expense Deduction

This is done by calculating the first year deduction. Once this is determined, the amount of that qualifies the expenses. There is also the need to determine how much of these expenses are deducted in the year.

Work Smart

 It is usually the best way to claim the 60 month amortization that can be deducted as early as possible. The IRS also determines that the business can also begin in the year before the election that lets the amortization of the startup costs. The right to deduct the costs in the earlier year can also be lost.

This is the calculation for the first year:

The initial year deduction amount must be determined. If there is more than $50,000 in the expenses, then it must be reduced to maximum amount of $5,000. For every $1 is $1 if there is $50,000 in total expenses. With that being said, if the total is $55,000, then all the expenses must be amortized in a period of 180 months.

It is also important to determine the monthly amortization amount. This can be done by subtracting the initial year deduction amount and get this from the total expenses. This is the amortizable amount and it is also divided from the amount so that monthly deduction can be calculated.

Determine the months of amortization is claimed on the tax return and also the business has been operated. The amortization period can also start the month that it has operated the business. The amount can also amortize the return on the number of months that the business can be operated on a monthly basis.

You will pay more taxes this year unless you set up a corporation

Using Corporations as Tax Shelters

A great form of protecting assets is creating a corporation. However, not a lot of people are aware that corporations can be made into tax shelters as well. Tax shelters are legal ways that allow to minimize or decrease the taxable income. This reduces the tax liability overall.

It is important to note that it is not as simple as incorporating this so that a tax shelter can be automatically granted. The real advantage of this route is that expenses are deducted in the business expense. This is not personally deductible. Businesses are taxed based on the profits that they make, and not the gross revenue that they accumulate. In a nutshell, businesses are taxed per dollar that they earn. This is extremely different from individual tax returns. The latter are taxed depending on their gross income.

To explain it thoroughly, individuals then earn money, but their income is taxed so whatever they have left from that is what they take home and spend. On the other hand, businesses and corporations earn money, spend what is necessary and are only required to pay taxes by setting it alongside the profits that they made.

There are businesses that incorporate so that they can avoid or lessen the taxes that they required to pay. This action is illegal. Business owners must have a legitimate reason and a motive to incorporate. If the business is sole proprietorship, then incorporating can also help with protecting the assets as well as time saving.

Timing Is Important

For those who are considering to start a new business, this is the perfect time. As a general rule, it is not practical to recharacterize the expenses the minute they are incurred. This means that if businessmen start their businesses, they should also incorporate this in the very year that their tax savings are captured of its costs. Failure to do so means that the entrepreneur can easily miss out on the significant cost savings.

Here is an example. There are people who can ultimately turn their hobbies into businesses they can do on the side. There are others who can also make this into a full-time business. This depends on the demand of their chosen entrepreneurial endeavor. These business owners must know that they should report this extra income that they are acquiring to the IRS. They will be taxed on it as if it was their income from the regular nine to five job.

These entrepreneurs can reduce their taxes if they can put the supplies that they purchased their expenses. However, all these costs must be listed as such or this will not be tracked. A way to do this efficiently is to be sure that this is incorporated during the tax year and then tracked. Startup costs can also be documented before the actual businesses started to make money. These can also be regarded as expense costs and can easily go through the incorporation process.

Unique Tax Deductions on Small Businesses

Small businesses can also make the tax deductions that the regular tax payers cannot. An example of this is education. If the employee is required to undergo some kind of further training in order to advance his or her skills in the profession that he or she is in, then the employee can deduct the costs related to tuition as business expenses. Education costs can also include more than just the traditional “college” setting. This also includes expenses incurred by trade shows, seminars and other avenues that are used to continue and pursue further education. CDs, books, DVDs and magazines that are purchased by industries and businesses can also be deducted. Looking at this example, it proves that investing in learning at any craft is good for a business.

Travel expenses can also make good business deductions. If individuals have to travel because they are expected to visit clients and attend shows or conferences, then the expenses from that travel are entirely deducted. This includes expenses from flights, cabs, hotels, gas and on-the-road costs. Food can also be in the budget.

Employees of a small business can also be good sources for deductions. There are small companies that resort to not hiring employees because there are complicated employment laws that also come with tax requirements but if the need for it arises because the business is growing, then it may just be worth considering. These are employee-related experience can also be regarded as deductible business expenses:

  1. Employee wages and salaries
  2. Benefits of employees (life insurance, health plans and educational assistances to name a few).
  3. Office related expenses like supplies, desks, computers and others.
  4. Profit-sharing or pension plans

Entrepreneurs who can manage to run the retirement savings of their company can also decrease the over-all taxes that they are expected to pay.

The Kind of Corporation is an Factor

“S” Corporation do not pay any income taxes by itself. It resorts to a “pass-through” entity. What this means is that the shareholders can include what they have in the company and its profits on the tax return that they file. They can pay these on the profits depending on their tax rates as individuals.

Whereas with “C” corporations, they have their own tax rules. It is also taxed separately and per entity. Because of this, there are some deductions that are only exclusive to C-Corporations. Companies pay the taxes on the profits that the shareholders do not possess. What happens is that shareholders are then taxed on the total income that is provided to them by the C Corporation. This results to double taxation. The first level is the corporate and the next level is the personal. This can be avoided by small businesses when their directors and managers expense out the profits of these companies through the form of salaries and other perks.

While both of the types of these corporations are offered in the form of tax advantages so that these can corporate the protection of the owners, then the S Corp is then viewed as the best deal for the companies that are on the start-up level. There are many businesses that tend to lose money during the first few years upon starting. The S Corporation lets these losses “pass through” so that the individual tax returns of the owners can reduce the taxable incomes. An example of these is that S Corps can enable the owners of the business to pay less on the Social Security Taxes and Medicare.

Key Facts:

  • Avoiding taxes by using corporations as tax shelters consist of 1/3 of the federal revenues.
  • US corporations amount to $90 billion in the form of dodged income taxes and this is done by shifting the profits and then turn these to subsidiaries.
  • US corporations acquire $2.1 trillion in profits – a number of this has not been taxed in the States.
  • General Electric, because of its outsourced businesses that is set offshore, managed to accumulate a total of $27.5 billion from 2008 through 2012. However, they only claimed tax refunds that amounted to $3.1 billion.
  • Apple also managed to acquire $74 billion on worldwide sales from 2009 to 2012. This excludes the United States. They paid almost nothing in American taxes.
  • There are 26 profitable firms on the Fortune 500 that did not pay federal income taxes from 2008 to 2012. 111 of these corporations are large and profitable and did not pay federal income taxes.

 Points To Consider

  1.  Tax breaks for corporations that merely ship jobs and also earn profits offshore must be ended. America is worth investing in so that there are jobs created for Americans.
  2. Whenever the corporations resort to tax havens so that they can avoid paying taxes, those that do the right thing have to do this for them. Families end up paying higher taxes and they get fewer services. Everyone else get a big deficit from this.
  3. Large corporations that dodge taxes do this by putting small businesses, so they can go around the rules and take advantage of this. Every business must be on the same level of the playing field.
  4. Corporations also claim that there are 35% in the form of corporate income tax and this is the highest when set to taxes around the world. This makes the business uncompetitive and also decreases job opportunities. Corporations fail to pay enough in taxes. There are many who even pay too little. The average American family pays more in income taxes in a year than General Electric. There are also large corporations that are highly profitable and pay tax rates amounting to less than 20%. They pay absolutely nothing. If these corporations pay less, then everyone else have to pay more. Corporations must pay what is required of them to make this fair.
  5. Corporations reason that repatriation tax holidays allow them to tabulate the profits and then invest and also create jobs. However, truth of the matter is that this can only result to failure. Companies have to cut jobs and also line up pockets for the corporate executives and the big shareholders. Tax holidays can also give tax breaks to the corporations that have accomplished the most in the aspect of dodging their taxes and paying what is expected of them.


A number of US corporations go through offshore taxes and perform a number of accounting gimmicks so that they don’t have to pay a whopping $90 billion per year just for federal income taxes. This is the large loophole when discussing US tax law. It also enables the corporations to avoid paying the taxes on the foreign profits unless these are brought home. This tactic is commonly regarded as deferral. It provides huge incentives to keep the profits offshore and for as long as this can be done. The corporations choose to not bring the profits home and at the same time not pay the US taxes that come with this.

Deferral in the corporate setting is an enormous incentive and can also be used as an accounting trick so that it would appear the profits were earned and then generated in the tax haven. The profits are eventually funneled in the form of the subsidiaries. This is often done by companies that have few employees and not as much business activities. This is effective because firms eventually launder the profits so that paying taxes can be avoided.

Loopholes used to Shift US profits to Tax Havens

  • US firms can start a subsidiary outside US soil and just focus offshore so that there are channels for the billions of dollars in profit to go through. This makes it disappear for US tax purposes. There is actually a box that can be checked on the IRS form.
  • Corporations can also sell the right to the patents as well as the licenses in a low price. This can then be licensed back to US ground and set the price so steep when sold within America. The goal is “transfer pricing” because it makes it seem that the company can generate profits in the tax havens but not in United States.
  • Wall Street banks along with credit card companies and the other corporations that have large financial units can also move the US profits offshore and then regard this as a loophole and call it “active financing exception.”
  • US corporation can also do the inversion by then buying a foreign firm and then eventually claiming this as the new company that is merged and regarded as foreign. This then reincorporates in the country that is the tax haven and put this in a lower tax rate. The process then takes place on paper and the company does not have to be moved to the headquarters in the offshore setting. The ownership is also unchanged, and the privileges can be enjoyed upon operating and for the taxes to be payed at such a low rate in foreign settings.


The way to solve this is to just end the deferral. Corporations should pay the taxes based on the income that they get offshore as opposed to indefinitely paying the income taxes in the US setting. This can also remove the incentives that are shifted by the US profits and to the tax havens.

Explaining the Pass-Through Income Anti-Abuse Rules in the House Tax Cuts and Jobs Act

An issue regarding taxes that deserve tax payer’s attention is the provision that lowers the rate for businesses that are classified as “pass-through.” Top marginal income remains at 39.6% and pass through the business income to remain at 25%. It is important to note that business income from C corporations are taxed two times. As for the pass-through businesses, such as sole proprietorships, S corporations and LLCs, only have one layer when it comes to taxation. This means that once the income has been passed, then it is passed. This single taxation makes the policy.

Because of this new tax cut, taxpayers are concerned and would prefer to recategorize their earnings as “business income” in order for them to get a rate cut that works for them and is also substantial. For a better example that can explain this situation clearly, an engineer can opt to provide his services as a contractor to his firm as opposed to working 8 to 5. This cuts his income tax liability. If this is the case, then he must pay the employer’s Medicare and Social Security. He could also adjust his contracting fees and the “cost” of this would be the amount the employer has to shell out to hire him.

This would benefit the engineer. For federal revenues, this is a bad deal. Tax collections decrease substantially but there is no economic activity that occurs. This results to the engineer having to carry the similar workload for less pay to bring home due to higher taxes.

As for the sole proprietorship scenario, if the entrepreneur receives taxable and ordinary rates on the wages, then she could benefit from the business income that is within the lower rate. It would be more practical to limit the amount of the wages received. In theory, the portion of the income that the entrepreneur receives is due to the wage income or the labor as well as some portion that is from the ownership and investment stake. The pass-through rate also provides the incentive for the place to generate as much income as possible and put this in the basket.

Lawmakers have also made it transparent that they must provide a cut in the taxes for the businesses. This is targeted mostly to small businesses. Economists can agree to this and also look into the tax-advantages of the C corporations that are taxed twice. The reductions also have to reach a lower minimum rate especially for the businesses that are regarded as “pass-through.” This also encourages the recategorization of the income of a substantial level.

There are three strategies that federal lawmakers can resort to which will solve specific problems that arise to drawbacks when it comes to taxes:

Method # 1:

Choose the formula that will determine the income that can be regarded as wages especially on the business owner’s tax return. This ensures that the income is still subjected to tax rates.

The idea is that the portion of the income is always attributed to the labor and the returns generate the capital for the business profits.

Advantages and Disadvantages

The method deducts the incentives that allow the employees to work as subcontractors, solely for the purposes of tax return. This limits the degree of entrepreneurs to reclassify their income from the overall wages to the profits of their business.

The disadvantage is that this is the tax preference that is likely to induce the least recategorization due to the fact that the entrepreneurs have to pay 70% of the income in the wages.

Another is that this is a blunt instrument that overcounts the business income and also undercount it for the others.

Method # 2

Excluding the owners and the businesses from the expected benefits of the pass through that are at the lower rates.

Advantages and Disadvantages

Attorneys, financial advisers and accountants, who are also regarded as professional service providers, incurs low returns to the capital and also the high returns of the labor, this can then receive the disproportionate advantage through the low pass rate. It is also absent from the sufficient guardrails. Another option to look at is to exclude these service industries from eligibility and to the lower pass-through rate.

It is also important to not note the non-neutral. This favors specific industries above the others but there is a wrong assumption that there is no return to the capital along with the businesses.

Method # 3

There are facts and circumstances that are determined to be holistic. There is also much income that is required to be set as wages.

Advantages and Disadvantages

This method lets the taxpayers show how much percentage of their income is from the business capital and how much of this is from the labor. The disadvantage is that the calculations for these rates are complicated.

For a number of pass through businesses, there is the rule of 70-30. This means that 70 percent is for the wage and 30 percent is allotted to the business income. This is by default. It also means that they can make the most out of the rate that is lower than 30% of the over-all income. This is said to be the derived amount from the returns and to the capital.

As for the businesses that believe there is an accurate assessment of the returns set to the capital, then there is the proof that this can show a depreciation and tangible capital of the business. This is also the purchase that is less than the MACRS depreciation. According to Applicable Federal Rates, this amount is multiplied by 8% and then added 7% to it. The income is usually greater than the 30% of the income in that year. The businessmen would pay lower than the pass-through of the income tax-rate on the specific amount. This is represented in the normal return on the investment.

Another impact is that there are professional business companies such as law and accounting firms that are excluded from the pass-through rate that is in the lower level. This means that the income they generate is preliminary subjected to the ordinary tax rates of the individual. These taxpayers are also able to prove that their businesses generate an income that is based on the property that is of an amount that is depreciated. This is subjected to the maximum rate that is lower and at its 25 percent.

It may sound a bit complicated, but these anti-abuse rules are actually a representation of an approach that is well-thought of with the intent to deal with this sensitive issue when it coms to taxes. Imposing weak rules could only open the opportunities for a certain group of taxpayers to recategorize their income.

How the rich goes around the tax bill’s break

The hallmark of the recently signed tax revamp is a breakthrough for small businesses that are regarded as “pass-through deduction.” This benefits the wealthy most of all, specifically President Donald Trump. To top this off, those who are earning high levels of income can easily skip the restrictions that the bill puts on the pass-throughs.

The target of this deduction are the small businesses. This composes the vast majority of the entities that are defined as pass-through. Its intention is to give a helping hand. When looking at the laws of previous years, the profits from hair dressers, landscapers and corner grocery stores, including small-business entrepreneurs are taxed at the range of its tax rates on a personal income level. This can range as much as 39.6%

Among these small operations are a string of large businesses like the Trump Organization, the Georgia-Pacific wood products company and the Dallas Cowboys Football Club. There are slightly more than two thirds of the income from high 1% of American households, as analyzed by the Treasury Department analysis.

Beyond that, it is also possible for the average entrepreneurs to go through the system and then slide through the restrictions that the lawmakers have placed in the tax bill so the system cannot be abused. For example, the Congress that controls the GOP can ban certain types of firms that are pass-through such as financial service providers and medical practices from receiving deductions. Other than that, it also imposes ceilings on what can be deducted. However, there are ways to go around these.

Let’s take a minute to look at the reason why these small companies are called pass-throughs? Well, first of all, the proceeds can just flow straight to the owners of the business. This avoids the double tax that the government requires large companies that earn at the corporate level as well as the compensation of the employees. As the personal rates on the highest group is lowered to 37% then those responsible for making the law lets the pass-throughs take in 20% reduction from the earnings. This then translates to a tax rate amounting to 29.6% of the owners.

When the new tax bill was signed, Democrats in the Senate and House unanimously voted against this because they believe that this is a provision that benefits the wealthy. However, there are still others who regard the deduction in the pass-through as a way to encourage the risks of entrepreneurial turns, which leads to growth in the economy. This leads to job creation. Despite the merits that the pass throughs encourage, it is still the early stage that appears to be beneficial for the taxpayers. This means that it can still go around the barriers that the Congress have erected. Here are some examples:

  1. Sidestep limits when it comes to reductions

This prevents the law from being the setting where the big bucks are placed. Congress has capped the pass-through in the income of the filers. This results to their inability to take deductions on half of the wages of the company. For real estate owners like Trump, who has few workers and would not get anything from the headcount method, there is another way. Base on this deduction on 1/4 of the wages, 2.5 percent of the real estate assets run through the millions, and sometimes billions. It is important to note that the Trump Organization has more than 500 entities.

  1. Alter your job classification

The new law that the bars submit through the businesses of lawyers, athletes, doctors and financial service providers such as stockbrokers are known in the legislation as “specific services” – and this takes some kind of deduction.

  1. Riding reputations

Famous people can organize the side business interests into the pass-throughs. Celebrities like Gwyneth Paltrow who has their own companies like Goop can sell products and even get better tax rates for products income. However, it is not possible for her to run on her being a celebrity to advertise her products.

Be a contractor

First, entrepreneurs should convince their bosses that they quit and then hire themselves back as contractors after this has been set as a sole proprietorship. Assuming that this can be done for the tax treatment is way better. It also offers the ex-employer the similar services for less than the company has to worry about giving benefits or paying the share for Medicare and Social Security taxes. This specific law requires that the regulations are written and also implemented. However, under the Trump Administration, it is highly doubtful that there will be damage or effect of the GOP vision. It is clear that the administration has some kind of hidden alternative for presenting this bill. It benefits the wealthy more than the working class Americans. Worse, it may even put individuals working in the United States and paying their taxes more in the coming years. The take home may be bigger now because of the cuts in the taxes, but in the long run, it might be more difficult for them to attain the financial stability that they have in mind and desire to have. Only time will tell how this turns out.

Understanding The 2018 Tax Changes

President Trump signed the Tax Cuts and Job Acts on December 22, 2017. It slashes the corporate tax rate originally from 35 percent and down to 21 percent the minute 2018 starts. In other words, the highest individual tax rate is now 37 percent and it also cuts the rates of the income tax, eliminates personal exemption and then doubles the standard deduction. Corporate cuts are usually permanent whereas the changes in individual cuts end by 2025. In a nutshell, here is how this new Act changes deductions for elder and child care, business taxes and income taxes.

Income Taxes

* The Act retains the seven income tax brackets. The only difference is that the tax rates are lower. Employees will eventually see these changes reflected in their February 2018 paychecks. The income levels rise every year because of inflation. However, they increase slower compared to the past because the Act is resorting to the “chained consumer price index.” This will eventually move people to higher tax brackets.

* The new Act doubles the standard deduction. Those who are single filers increases the deduction from $6,350 and to $12,000. Those who are Married and also Joint Filers find their tax increasing from $12,700 and reaching $24,000. This means that the over-all 94% of taxpayers get the standard deduction. The National Association of Realtor and National Association of Home Builders are against this. When taxpayers take the standard deduction, only a handful of them would make the most out of the mortgage interest deduction.

* This can lower housing prices. This is why people are now concerned about the real estate market. They think it is currently trapped in a bubble which could burst anytime, therefore resulting to another collapse.

* It eliminates personal exemptions. Before President Trump signed the act, taxpayers are deducted $4,150 from their income every time they claim one dependent. This then results to families with multiple children paying higher taxes regardless the increased standard deduction that the new Act has imposed.

*It eliminates itemized deductions. This covers moving expenses. Only members of the military are exempted from this. This means that individuals paying alimony are no longer deducted for this, whereas those receiving the alimony can. This begins in 2019 for couples that signed the divorce in 2018.

*The new tax code retains the deduction for retirement savings, student loan and charitable contributions.

*It limits the deduction on the mortgage interest for every $750,000. Deductions can no longer be applied on the interest of home equity. Those who currently have mortgage are not affected by this.

Those who pay taxes can subtract to a total of $10,000 on local and state taxes. They have to choose whether the taxes will be on the property taxes, sales taxes or income. Taxpayers in California and New York, both high tax states, are in the losing end here.

The New Act Regarding Medical Expenses

The Act expands the deduction for 2017 and 2018 medical expenses. It lets the taxpayers deduct their medical expenses that range around 7.5 percent and even more of their income. Before this bill, the cutoff for medical expenses was 10 percent for insured individuals who were born after 1952. Obviously, seniors already receive the 7.5 percent cutoff. Statistics show that around 8.8 million people have already used this deduction in 2015.

The Act also repeals the much-discussed Obamacare tax for individuals who do not have health insurance in 2019. Without this mandate, the Congressional Budget Office predicts that around 13 million people will discontinue their plans. Therefore, the government would eventually then be able to save around $338 billion because there is no need to pay for the subsidies. The downside to this is that the costs of health care will increase. This is because fewer people get the preventive care required and needed in order to avoid those unexpected visits to the emergency room. Maine Representative Senator Susan Collins approved this bill because the President promised to reinstate the subsidies to the insurers. This is outlined in the Murray-Alexander bill.

The overall subsidies of $7 billion is reimbursed through lowering the costs for Americans who are within the low-income range. However, the CBO has stated that it will not offset the health care prices that are higher in value and were created by the repealed mandate.

This Act also doubles the exemption of the estate tax down to $11.2 million for the single taxpayers and around $22.4 million for those who filed as couples. This benefits those who are in the top 1 percent of that group. These higher 4,918 tax returns have a total contribution of $17 billion in their taxes. The exemption also reverts the pre-Act levels in the year 2026.

It maintains the Alternative Minimum Tax. It increases exemption from the amount $54,300 to $70,300 for the singles and as for those who filed as joint, this ranges from the amount $84,500 to $109,400. As for the exemptions, the phase out is at the amount of $500,000 for the single taxpayers and $1 million for those who filed as joint. This exemption also reverts to the Act levels of the year 2026.

Elder and Child Care

As for the Child Tax Credit, the Act raises it from the amount $1,000 to $2,000. For parents who do not earn enough in order to pay the taxes, they can claim credit as much as $1,400. It also increases income level at $110,000 to $400,000 for tax filers who are married.

This lets the parents use the 529 savings plans to pay for the tuition in private schools, as well as religious schools with the K-12 program. They can also resort to these funds to pay for the expenses that are acquired when children are home-schooled.

Every non-child dependent is given $500 credit. This assists the families in caring for their elderly parents.

Taxes on Businesses

The New Act decreases the maximum tax rate of corporations from 35 percent down to 21 percent. This is the lowest that it has been since the year 1939. For the longest time, the United States is included in the list of countries with the highest rates around the world. A number of corporations do not pay that much. Therefore, on average, the reasonable and effective rate is around 18 percent. Large corporations employ tax attorneys who assist them in coming up with ways so that they do not have to pay more.

This then raises the standard deduction to the amount of 20 percent for businesses that are referred to as “pass-through.” This deduction is said to end after the year 2025. Those considered to be pass-through businesses are sole proprietorships, S corporations, limited liability companies and partnerships. They also cover hedge funds, real estate companies along with private equity funds. The deductions are then phased out for the service professionals who reach the income amount of $157,500 for singles and as for joint filers, it’s around $315,000.

This New Act sets limitation to the corporations’ ability of deducting the interest expense down to 30 percent of the overall income. Within four years, the income is based on the EBITDA but this also reverts the earnings before the taxes and the interests. This makes it more expensive for the financial firms to borrow some money. The companies will also have less opportunities to issue the bonds and buy their stock back. Stock prices may fall. This limit generates the revenue to also pay for the other tax breaks.

It lets the businesses also deduct the overall costs of the assets that are considered to be depreciable and have this done in one year as opposed to amortizing these through several years. This, however, does not apply to the structures. To qualify, the equipment can be purchased between September 27, 2017 and January 1, 2023.

The New Act also requires the requirements to be stiffened especially on profits that carry interests. Carried interests are usually taxed at the rate of 23.8 percent as opposed to 39.6 percent. The firms are then required to hold these assets for the duration of a year so that they can qualify within the lower rate. The Act also extends this requirement to last up to three years. This may not benefit the hedge funds that have the tendency to continuously trade. It would also not affect private equity funds that are within the assets of five years. This change in taxes could increase the revenue to $1.2 billion.

It also eliminates the corporate AMT. This had a tax rate of 20% that kicked in if the tax credits pushed the effective tax rate of the firm right below that specified level. Under the AMT, these companies do not have the ability to deduct the spending budget for research and development as well as the total investments especially in a low-income neighborhood. By eliminating the corporate AMT, it adds a total of $40 billion to over-all deficit.

The New Bill also advocates the change from the “worldwide” tax system that is currently operating and turn it into a territorial system. Under this, multinationals receive taxes based on the foreign income that they have earned. They also do not have to pay the tax unless the profits are brought home. This results to corporations basing their businesses overseas. When it is set in a territorial system, these businesses are not taxed on the profit that they earned on foreign soil. There are more chances that they will invest this within the United States. This benefits the pharmaceutical as well as the high tech companies, most of all.

It lets the companies repatriate the overall $2.6 trillion that they hold in stockpiles. They only have to pay the tax rate that is usually 15.5 percent once and also 8 percent for the equipment. This repatriation could also raise the yields of the Treasury note. The corporations that hold the most of the cash in the treasury notes usually sell them because the supply that are in excess often send the yields on a higher basis.

Other Benefits of the New Tax Bill

* It lets the oil drilling within the Arctic National Wildlife Refuge. It is estimated to increase this by $1.1 billion in total revenue over a period of 10 years. When drilling this, it may not appear profitable unless it gains $70 per barrel.

* It retains the tax credits for the wind farms and the electric vehicles.

* It also cuts the deduction for the drug research targeted on orphans from 50% and to half which is 25%.

* There are cuts on the taxes of liquor, beer and wine. The Brooking Institute has an estimation that amounts to 1,550 more deaths that are related to alcohol. The studies also discovered that if the alcohol prices are lowered then there are more purchases of this product and therefore results to death tolls being higher.

How It Affects Taxpayers and Individuals

This new tax plan assists businesses, and not individuals. The tax cuts on businesses are permanent whereas the individual cuts have an expiration, and this is 2025. However, the largest private employer in the country, Walmart, has released a statement that they will increase the wages of their employees. They will also use this additional money that they have saved from the tax cuts to divide it in the form of bonuses and then also increase the benefits.

As for individuals, the clear winners are the higher-income families. Those who are within the 20-80 percent of the income range receives a 1.7% increase in their income after tax. Those who are in the 95 to 99 percentile will benefit an increase of 2.2%.

The Tax Policy Center also estimates that the ones in the lowest earning percentile would see their income at a rate of 0.4% higher. As for those who are in the next highest percentile, they are expected to receive 1.2 percentage boost. Those in the next two quintiles can see their income raise by 1.6 to 1.9 percent. The biggest increase goes to those who are earning the most.

The Next Shelter for Wealthy Americans: C Corporations

Because of the intricacies from the tax code, companies and businesses are encouraged to turn down the traditional kind of corporate business. This is the C corporation. Instead, they are asked to organize what is popularly known as “pass-throughs.” This has also been what is regarded as the norm. These businesses are not taxed at the corporate level but at the bracket of the individual income tax. The incentive for the business to be structured as such is so influential.

The pending reaction of the corporate tax rate form the 35% maximum and down to 20% also flips the equation for a number of taxpayers. It gives the business owners and a couple of wage earners a process to protect their income tax rates and let it reach to a 42.3% high. This is done by becoming C-corporations. The Senate tax bill also includes the rules to put a limitation on the professional’s ability. These professionals are the layers, managers and doctors. They can no longer incorporate and have the label income regarded as a corporate profit. Instead, a business that is non-corporate may also be elected to be taxed at a rate in the corporate level. That election is simple, and it requires a checkbox without even having him a form. There are no required lawyers during the interrogation.

This kind of tax sheltering does not only cost the Treasury a vast and substantial overall fiscal total, it also benefits the one with the most income and the most financially sophisticated Americans that have no influence whatsoever in the total economy. It also does not create jobs.

While there are certain elements of the proposals from the GOP that is an illustration of what may improve the current system in the corporate taxation, this is also the opportunity to shelter what can reduce the revenue and also benefit the high income taxpayers. It also introduces the new costs of inefficiency to the domestic tax system. The way to end these opportunities for the over-all tax arbitrage that very minute is to keep the rich Americans from playing with the tax system and leading it to their advantage. The point is to tax all income, whether it be individual or business, and make the rates effective. Without this approach, lawmakers must at least address that there are loopholes which will exacerbate this new kind of tax sheltering.

What is a Tax Shelter?


It is important to note that under the new bill, the payers with the higher income can transform into C corporations.

Under this newly signed bill, the rate of the wage earners will reach a high 42.3%. This includes payroll taxes and income. The highest rate of the income for pass-through businesses, especially when taken into account can also benefit how this is deducted for entrepreneurs of this kind of business. The calculation is looking like it will be 29.6%.

C-corporation shareholders can also pay the 20% corporate tax as well as pay for the dividend of the capital gains taxes on the individual tax returns that reaches up to the 23.8%. Whenever taken in practice, the effective rate on the capital gains have the tendency to be lower than the statutory rate on the capital gains and it becomes lower than the rate because of the shareholders that defer the shares and because there are a number of provisions that also eliminate the tax entirely. Aside to the lower rate, the form for the C corporation also allows that a number of taxpayers are given the ability to deduct the fringe benefits and a number of these are the pass-through business owners that are unable to be deducted, such as the premiums on health insurance and the fringe benefits. These are also used to itemize the deductions such as the paid local and state taxes which are no longer deductible for the individuals. This tax treatment is favorable for those who are earning high wages and owners of pass through businesses because they can turn their income into profits for the corporation.

Aside from this, the capability of the high earners and high-income tax payers to turn their income from a high tax wages and into corporate profits cannot be interrupted. The Senate bill includes provisions that are to limit the ability of the service businesses like those working in the aspects of law, health, engineering and architecture. This is what they do in order to make the most out of the deductions that are available in the pass through businesses. There are no prohibitions that applied to the C corporate businesses. In the 1970s, whenever the top individual income tax rates are significantly higher than the income tax rate of the corporation, there are high-income individuals that incorporate the C-corporations in order to shelter the income from the individual tax rates that are higher than the average. An example is that it can eventually be tax-efficient only for those who have bonds that bear interests in a corporation. This being said, it benefits companies more than individuals. When making the switch from the pass-through kind of business and into the C corporation form, the steps are simple. Today, the pass-through business owners essentially just check on a box on the tax form, specifically Form 8832, and therefore electing themselves into a C-corporation. It is difficult to argue that the bill favors these businesses because entrepreneurs can choose to file under this method so that they can lower their accumulated taxes.

Tax sheltering will also cost the Treasury a significant amount of the money. IT also benefits the most financially sophisticated and highest income earning Americans in methods that cannot do anything in order to help the total economy so that jobs can be created.

The magnitude of the total breakfast is expected to be quite large. In 2014, about 75% of the income from the pass-through businesses can total around $674 billion that is accrued to the taxpayers that are facing a different bracket rate, which is 25% above the norm. Meanwhile, 50% of the businesses that are pass-through also total to an amount of $464 billion that is connected to the owners. In the top brackets, a large share of the businesses can also benefit the C corporations in order to pay taxes rate that are much lower.

Wage Earning Corporate Managers will also benefit from the new bill

It is most likely that the large share of income and wages that are paid to the corporate managers are in a switch form. Take into consideration, individuals that are their own entrepreneurs because they have S-corporations and C-corporations. Closely held are the corporations with the small number of the shareholders. The stock is also publicly traded and once the managers and the owners file the corporate tax return then this is generally subject to the legal protections as that of the C-corporations. The income is then pass-through the pro-rata along with its shareholders.

Nowadays, the individuals are also generally elected so that the corporation’s income can be received in the kind of wages that let them be on the top rating. It is also well combined on the corporate profits. In 2013, total wages can also pay to the C-corporation representatives a total amount of $225. The majority of this compensation is also paid so that the managers and owners of small businesses are closely held. Aside from this, the wages of the S-corporation businesses are also paid to the individuals who are both employees and owners. When combined, these S-corporation wages equate to around 57% of the aggregate S-corporation that the business can gain the income. Around 70% of this officer compensation of the S-corporations are also accrued to the top individuals. The 1% of the income distribution can also have quite a great incentive and then shift the form of this income once the business rates of the corporation can also decline in a substantial connected to the rate of the labor income. The very cases where this exists, the manager is the owner and they decide to switch this corporation to receiving the income and then turning this into profits and wages because it is more straight forward. The higher income workers can also get in on the deal. It is so easy to declare that you are your own boss and no longer an employee. You are a person that sells your own services.

“Tax Shelter” is a pejorative term because it is a legal way to reduce liabilities in taxes. Someone who believes that this is a feature of the tax code gives the taxpayers the very right to deduct the taxes. It may not be a good idea, but it is the very label for a shelter. Most people regard this as some kind of incentive on the tax code of a shelter.

Corporations and individuals can reduce the final tax liabilities and allocate the proportion of the incomes in the tax shelters. They are also often classically connected with the high earners and established corporations and wealthy households that are also connected to the Swiss bank. Tax shelters are more widespread and easily accessible than what the suggestion implies. Take for example, the employer-sponsored of 401(k) programs. This individual retirement accounts are also accessible and widespread that the individuals can look into this as some kind of “shelter” for their income from taxation.

Whenever Sheltering Becomes Too Abusive

The IRS or the Internal Revenue Service can also make a distinction between the sheltering that encompasses the legal forms of deducting the tax liability and also serves as the aforementioned in the retirement plans. It may be abusive in the tax sheltering but this is also illegal. One example of the abusive tax-sheltering scheme which leads to the use of trusts that can reduce the liability by over-claiming the deductions are also hiding the known assets from the taxation.


Tax shelters are also beneficial whenever considered at the firm and individual levels. There are also some tax shelters can also be desirable regarding the distortionary effects that have the burden so substantive and also placed on the tax system. It has been through the tax base erosion. The erosion of the tax base is connected to the loss that has been accepted simply for the large and benefitting tax shelters. There are also shelters that gain little to even no benefits and this are very much harmful. Take for example, the individuals and firms that cannot store their wealth in the offshore accounts because they are usually found in countries that have tax rates and laws that are more advantageous than what is in the United States. In fact, around $1,200 billion of wealth has been stored in the offshore tax havens in 2014 and this results to a loss in tax revenue that is $35 billion.

Aside from eroding the tax base, the tax shelters are also the host of other effects that are considered to be quite distortionary. For example, the corporate wealth that is stored offshore in the tax havens can also be repatriated to the United States even without obtaining the tax burden that the corporation is trying to steer clear off. This lack of capability to get the wealth that can drive the firms to find debt financing can also depress the valuation on the market.

Tax Havens

“Tax havens” are specific means of tax sheltering. The tax haven is also serving as a locality – that can be the very much a region, a state or a country. It has also turned into a personal income tax rate or a lower corporate that the tax havens can also have the other properties that may store the income that is more desirable and also become the secrecy of the bank and also look into the incorporation. This is very much the reason why it has to be made clear that the new bill actually contains glitches that benefit corporations more than individuals.

Restructuring State and Local Taxes to Maintain Deductibility

Tax reform is expected to eliminate the local and state deductions. The reason behind this is that it encourages the local and state government to increase the taxes. If tax reform manages to eliminate the deduction, then the local and state governments will be facing a bigger and stronger pressure in keeping the taxes low.

Violating Neutrality that is Appropriate in Some Circumstances

The sole purpose of this tax reform is to liberate the economy in order to gain more strength by setting the neutral tax base and is lowered in the tax rates in a revenue-neutral manner. This can also improve the incentives for businesses as well as families along with entrepreneurs and investors that can engage in the activity.

Neutrality’s principle keeps the taxes in such a way that it does not influence the decisions of the taxpayers on an economic basis. By maximizing the economic growth, the tax reform can institute this in the neutral tax code in a reasonable level. Nonetheless, there are still some instances that violate the neutrality and is still regarded as appropriate.

Whenever there is an anomaly that is historically unavoidable, then this case is exclusive for the employer-provided health insurance. This exclusion is also a historical artifact that dates back to the 2nd World War. Because by eliminating this, there are other reforms that can create the major disruptions that are apparent in the health insurance market. There are also some sensible tax reform plans that can also retain the exclusion and also provide the credits for the families so that they can obtain the health insurance.

A similar instance is when the beneficiary of the specific policy justifies that it is more harmful than neutral. Earned Income Tax Credit is retained so that families that are in the low-income bracket can improve their situation.

Note that tax reforms must eliminate the neutral policies containing negative consequences and intention. When this is done, then neutrality will be eliminated.

State and Local Tax Deduction is Neutral and Must Be Eliminated

The tax code lets the taxpayers deduct certain local and state taxes that include income taxes and sales taxes specifically for the residents of states. These go without the income tax, personal property taxes and real estate taxes. Local and state income taxes also make up around 95% of all the local and state deductions.

According to the tax policy theory, the reductions are neutral because taxpayers may not have to pay on the income tax that they really do not save or spend. The local and state taxes also deprive the taxpayers allow the ability to do both with the taxes and the income that they can claim.

However, the downside to the theory of the tax policy usually does not keep to what is known information on the economic reality. When it comes to the local and state tax deduction is the harmful negative consequences. It also creates the benefit of ensuring the taxpayers that do not pay income tax the reality that they cannot save or spend.

The deduction from this results to another circumstance that warrant and violates the neutrality. This is the very reason why tax reform must eliminate it.

Deduction Encourages the Local and State Governments to Raise the Taxes

The harmful and unintended consequences of deduction is that it influences the local and state governments to increase their taxes. However, higher taxes also let the local and state governments grow larger because there is a need to spend the maximum amount of revenue that is possible for them to collect.

The deduction also encourages the local and state governments that can raise their taxes because it is possible to transfer some of their tax burden percentage from the residents and to the federal government. For example, every dollar that the state taxes one family that pays the 33% federal marginal tax rate, the family can also effectively pay a percentage. Specifically, this is $0.67 of the state tax. The deduction on the federal taxes of the family reduces the tax bill by $0.33.

This deduction in the mentioned price of the state and its required taxes also influences the states to increase their taxes higher. This is because taxpayers can also offer a lower amount of resistance because they really do not pay the full amount of the higher taxes. Taxpayers are also more willing in accepting the higher taxes due to the deduction that the consumers are willing to purchase a service or product especially when the prices decrease.

However, there is no connected reduction in the federal government when it comes to the revenue from the deduction. The federal government does and can borrow freely. This is why Congress spends amounts of tax revenue that is irrespective. The local and state governments have also less latitude in terms of borrowing in order to spend more that is closely matched to the tax receipts.

If this deduction is removed from the tax reform, then the overall amount that the taxpayers pay in terms of taxes are least likely to not change. Tax reform should be in the form of revenue and distributed in a neutral setting. This means that the taxpayers must pay the same amount of federal taxes like they did before. However, the federal taxes can no longer reduce this burden effectively on their local and state taxes.

The taxpayers are now faced with shouldering the burden of local and state taxes. Taxpayers are also more likely to reduce the existing tax burden. By combining these effects, they can restrain the tax burdens on both the local and state government level.

States with the Highest Taxes Would See the Greatest Pressure

The municipalities and states with the highest taxes have the biggest pressure in lowering the taxes of their residents. Taxpayers that are in states with high taxes also tend to have higher incomes. For example, based on a study conducted by the Tax Foundation, Connecticut, New York as well as New Jersey have the highest local and state taxes and burdens. They are also ranked in the top five in regard to the per capita income. The number of the high-tax states usually have relatively high per-capita compensation.

Those who are paying higher income taxes can also claim the deduction in the local and state taxes level. According to the IRS, the taxpayers who earn around $100,000 due to the claim can get a 76% deduction.

Data shows that tax payers who are residing in states with high taxes usually already pay hefty amounts on the local and state taxes. There is also a burden that is reduced through the deduction. If tax reform manages to eliminate the deduction, then the taxpayers can see a big increase in both their local and state taxes. They can also put pressure on these government ordinances in order to stop the increase in taxes and allow them to apply pressure on them so that higher taxes can be reduced.

Lower Rates are an Added Bonus

By eliminating the local and state tax deduction can only be done when it is within the context of the tax reform as an overhaul. Congress must not eliminate this without offsetting the changes in the taxes. In order for them to do this, then there would be unnecessary increases in taxes.

Eliminating the deduction in the total revenue whether it be in a neutral tax reform can also allow the marginal tax rates to be lowered for families. The local and state deduction can also reduce the taxes to $1 trillion over 10 years. Revenue can also be provided for the substantial and additional reduction in the rates. If the rates are lower, then it also enhances the growth-promoting potential of the reforms in taxes. This is also an added bonus when the deduction is eliminated.

Eliminating State and Local Tax Deduction in Order to Pay for Tax Cuts

The tax plan that President Trump and the congressional Republican ends the federal deduction that is allotted to SALT or the state and local taxes. This lets the taxpayers itemize their deductions on the income taxes from a federal level and also deduct the local and state taxes. There are proponents that argue that when this deduction ended, it will not hurt the middle and low-income households because the direct benefits are targeted to the higher-income filters. By eliminating this deduction, the federal income tax will eventually become more progressive. However, it also ignores that the actual tradeoff of the GOP tax plan is proposed. This eliminated the SALT deduction and then resorts to the revenue so that the marginal income from these tax rate cuts can be bad for most Americans, particularly those who are considered to be middle and low class.

The first thing to know is that the rate cuts in the tax plan tend to be tilted especially concerning the SALT deduction. This is the reason why the year 2027, 80% of the net tax cuts are shifted to the top 1 percent of the Americans. This is when they claim that the key elements of the current plan will completely take in effect. The Tax Policy Center has estimated this.

Secondly, the SALT deduction assists the local and states funding especially in the public services. They provide widely shared benefits. Because this deduction is of a high income and a number of people are willing to support the taxes on the local and state level, then repealing this deduction can definitely make it harder for both the locality and the state.

When the deduction is repealed and rejected, then it is harder for the localities and the states to tackle the budget strains. It raises the sufficient revenues especially in the coming years for the government to fund higher education, including K12, and above all, health care. In order to balance the budgets with revenue that is insufficient, the policy maker of the state likely makes cuts in particular services that would make it most felt. It would also push the costs to the low and middle-income people, making the local and state tax systems and make it more regressive in the over-all setting.

States and localities can also respond when raising the fees and taxes that fall heavily on the residents who are within the higher-income bracket. It would also push the costs into the low-and middle-income individuals and make the local and state tax systems more regressive than it already is.

The proposal to end SALT deduction and make it harder for localities and states to fund the current programs that they have in mind allowed the President and the Republicans to come up with a proposal of a 10-year budget that shifts the substantial and new costs to the states. It also sharply cuts the Medicaid and other funding of the health insurance and potential cuts the federal support for the local and state services such as transportation, low income housing, education and environmental protection.

Responding to the criticism of the Republican representatives of Congress who also represent varied states could be a particularly difficult approach if the intent is to end the SALT deduction. GOP leaders have considered a number of compromises that would partly, as opposed to entirely, end it. These also include capping the deduction and then ending that for the income taxes and not the real estate taxes. Letting the filers take the SALT deduction or another like interest deduction and home mortgage. Both cannot be taken. Partially ending this new deduction process is particularly harmful for middle and low-income Americans. However, since the states and localities will eventually weaken, then it is time to increase the adequate revenues.

Trump administration official pointed the estimates that show most of the deductions from SALT on the federal tax benefits go to people earning $100,000. Higher income filers can also benefit more depending on the deduction because these are likely to be itemized, claim the higher amounts of the deductions, which also include the SALT, and resort to higher federal tax rates.

Live Seminar – Prepare Yourself To Take Advantage Of 2018 Tax Reform

Meet with Sanjiv Gupta CPA @ Live Seminar

Come and interact with Sanjiv Gupta CPA on Feb 25th, Sunday ( 10 am to 2:30 pm).  Lunch will be served.  Small business owners and individuals will greatly benefit from this event.

Sanjiv ji will focus on educating the audience on the 2018 tax reform.   You will understand how to structure your income and expenses to take advantage of recent tax law changes.  Majority of the time will be spent to discuss tax saving tips and interacting with the audience.

You can expect us to go over 50+ changes that are going to take effect this year and how you can position yourself to talk advantage of these changes.

See you at the event – Registration is only $15 (Includes Lunch).

Location: UlavacharU – 685 East El Camino Real – Sunnyvale, CA 94087



What To Expect @ the Seminar: We talked about these subject briefly in our last webinar. Sanjiv Ji will discuss all sort of tips to help you maximize your bottom line in 2018.

1.) How individuals and business owners will be impacted by the 2018 Tax Reform

2.) How 2018 Tax Reform will impact Real Estate Owners & Investors –

3.) How setting up a company in 2018 can be really helpful for everyone –