Month: April 2018

Many small businesses are passthrough entities, including S corporations, partnerships, sole proprietorships, LLCs, and LLPs. The label indicates that all business earnings are passed through to the owners’ personal income tax returns. Thus, they avoid the corporate income tax.

The Tax Cuts and Jobs Act of 2017 contains a new tax benefit for pass-throughs. This provision is complex, but it is relatively straightforward for taxpayers with taxable income below $157,500 in 2018, or $315,000 on a joint return. Such business owners may qualify for a tax deduction that equals 20% of their qualified business income.

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A key component of the Tax Cuts and Jobs Act of 2017 is the expansion of the standard deduction. In 2018 standard deductions are $24,000 (married couples filing jointly), $18,000 (heads of household), and $12,000 (all others). These amounts are almost double the respective standard deductions in 2017. However, personal exemptions were eliminated. The new tax law also trims some itemized deductions. Taxpayers can either itemize or use the standard deduction, so some shift to the standard deduction is likely.

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It has been widely reported that the Tax Cuts and Jobs Act of 2017 lowers federal income tax rates for many people. The highest tax rate, for example, has fallen from 39.6% to 37%. However, there are some quirks in the new tax rates, and some people will actually face higher rates. For example, an unmarried person who had $220,000 of taxable income in 2017 would have been in the 33% tax bracket. With that same income in 2018, this taxpayer will face a 35% tax rate. To find your new tax bracket, refer to the table below.

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