Changes to Tax Brackets and Deductions will Impact Filing and Returns
- Structurally speaking, the tax system will get trimmed significantly. Trump’s first major change is to reduce the current 7 tax brackets to 3 brackets.
- The biggest change to the proposed tax system? Simplification, not necessarily fewer taxes.
- For a single real estate agent with $100,000 in net business income, you would pay $1,764 less in federal income taxes under Trump’s proposed plan, or a “true profit” increase of 2.15 percent.
The inauguration of President Trump is still fresh in people’s minds, but his administration is already taking swift action to implement campaign promises.
Should you expect to make more or less money under the Trump tax plan? Should you prepare your business for a drastic transformation of the tax code?
What most agents should remember about taxes
For most real estate agents, your tax rate is equal to your personal rate, because your business’s income is taxed at your personal rates (unless you incorporated your real estate business as a C Corporation).
Sole proprietors, LLCs, partnerships and S Corporations are “pass through” entities, meaning that any income is passed through untaxed to business owners, who must then pay personal income tax on the dollar amounts passed through to them.
President Trump has already outlined what changes he plans to make to the personal tax code, so that is what most agents will want to watch. Let’s take a look at what his changes mean to you as a business owner and taxpayer.
Trump’s tax proposal
Structurally speaking, the tax system will get trimmed significantly.
Trump’s first major change is to reduce the current seven tax brackets to three brackets.
The three proposed tax brackets are the following:
Simplification: Good or bad?
Another major difference that Trump’s administration wants to pass into law: deductions.
The current 2017 standard deduction is $12,700 for married filers and $6,350 for single filers. Under the new Trump tax plan, the new standard deduction would jump up to $30,000 if you’re married and $15,000 if you’re single.
That means your taxes are calculated after subtracting the standard deduction from your net commission income.
Although this sounds like a huge drop in taxes, Trump’s plan proposes further simplifying the tax code by eliminating the personal deduction, which is currently $4,050 for yourself and any dependents you can claim.
In other words, Trump’s proposed plan would eliminate an existing deduction that mostly helps large families, and this would partly offset the large increase in standard deduction. The biggest change to the proposed tax system? Simplification, not necessarily fewer taxes.
A look at some real numbers
Now, this probably sounds a little abstract. Let’s go through a concrete example that demonstrates exactly how your real estate “true profit” might change under the Trump administration — your actual profit after subtracting both business expenses and taxes.
Let’s assume you have $100,000 taxable income (commissions minus your real estate expenses).
We’ll also assume single filer status, a state with no income tax (like Texas or Florida) and that you elect to take the standard deduction.
So how does the current tax plan vs. the Trump plan affect your profit?
Under the current tax code, your $100,000 in taxable income would incur an estimated $18,139 in federal taxes, making your “true profit” $81,861.
Under the Trump plan, your $100,000 in taxable income results in an estimated $16,375 federal tax payment, making your “true profit” $83,625.
In simple terms, you would pay $1,764 less in taxes under Trump’s proposed plan, or an increase of 2.15 percent.
What’s it mean?
So what does all of this mean for you as a real estate agent?
Well, if the Trump tax plan gets passed exactly as outlined (which is pretty unlikely), then you’re set to make slightly more than you would under the current system. And, it should be easier to calculate and file your taxes.
This small change doesn’t necessitate you making any drastic changes to the way your real estate business operates, but knowing the real numbers can help you avoid any stress, confusion or misguided optimism you may experience if Trump’s tax overhaul gets signed into law.