It’s big news no matter which side you’re on. The nation is now headed into the new year with a whole new set of rules for paying taxes. Congress just passed a tax reform compromise bill, and sent the bill to President Trump for his signature. While there’s much to be concerned about in terms of spending cuts, there’s plenty to celebrate if you are a real estate investor.
After a few glitches in the Senate’s final vote on the bill, the tax overhaul went back to the House on Wednesday for approval, and passed with a vote of 224 to 201. This is a major victory for the President. He made tax reform a key piece of his campaign platform, and is now delivering on that promise.
The President wanted to get it done before the holidays and said during a cabinet meeting, “It will be an incredible Christmas gift for hard-working Americans. I said I wanted to have it done before Christmas. We got it done.”
The head of the House Ways and Means Committee, Kevin Brady, told Politico, “This lets our families and small businesses keep more of what they earn so that their communities and our country can grow again. This is a bold reform that shakes America out of its doldrums and gets our jobs coming back to America.” (1)
Not everyone agrees with that. Critics believe the bill is a gift for the rich, and that President Trump will be one of the major beneficiaries. They say, middle-class and low-income Americans will get next to nothing in terms of tax savings, and that corporations will reap all the benefits.
Democrats are hoping Americans hurt by this tax package will help vote Republicans out of office in 2018. Of course, Republicans are hoping to do the same thing, in reverse, by promoting all the tax benefits, and getting their candidates elected (2).
What’s In It?
GOP supporters say the $1.5 Trillion legislation will give the U.S. economy a big jolt, and help individual taxpayers as well. The bill will permanently reduce the corporate tax rate from 35% to 21%. Pass-through entities will also get a huge tax break, to as low as 20%. Both of those are expected to gives businesses the financial fodder they need to expand their business activity, and hire more employees. That’s along with tax benefits that will help individual taxpayers. Republicans say it’s a win-win for everyone.
The tax plan also provides new ways for households to save on taxes. House Speaker Paul Ryan said, the tax savings for an average family of four, earning a median income, will be roughly $2,059 next year. But those tax benefits will expire in 2025, resulting in a tax increase. Republicans say that Congress won’t let that happen.
One of the most controversial parts of the bill is the pass-through deductions. Understanding this part of the tax reform package will be very important for real estate investors since most of them operate as an LLC, which is a pass-through entity.
Under current law, the pass-through business owners pay taxes according to their individual tax rate. To give pass-through entities tax treatment that’s similar to corporations, the new plan will allow those entities to deduct 20% of their pass-through business income. There are also clauses in there to prevent abuse of the deduction. One prevents high-income individuals from re-categorizing that income as pass-through income. Another caps the 20% deduction at $157,500 for individuals and $315,000 for married couples.
There’s also a formula for determining whether a larger company can deduct income above the pass-through caps. Reuters said of this part of the legislation, “An assessment of the Republican bill by 13 tax experts, mostly academics, said the formula would expand the ability of highly paid owners in certain industries — and particularly those heavy in property but light in employees, like real estate — to qualify for pass-through deduction.”
Tax Reform Learning Curve
There will certainly be a learning curve for this new tax plan. To help sort through the details, I will be talking to a certified public accountant who specializes in this kind of tax accounting, and takes pride in helping people sort through their IRS problems.
At the writing of this podcast, President Trump hadn’t signed the bill yet. The celebrations are expected to take place at the White House, but there are reports the President will not give his final approval until lawmakers “waive” a rule that would trigger automatic deep spending cuts to Medicare. Republican lawmakers have said they are planning to do that by the end of the week, so they may have done it by the time you are listening to this podcast.
(1) Politico Article