What is Income Tax?

What is Income Tax?

Listed below is just a snippet of information from the Tax Cuts and Jobs Act of 2017. The entire Tax Cuts and Jobs Act of 2017 is not contained in this book. Only portions and components to make a point on some simplified methods within the new tax code. These new rules will apply to the tax year starting in 2018. The law will be in place until December 31st, 2025.

There are two different types of taxes small business owns have to pay. They include self-employment tax and income taxes. Self-employment taxes was discussed in the prior chapter. So, we will discuss income taxes during this chapter.

All working citizens will have to pay income taxes. The income tax system has been recently changed due to the new tax which is called the Jobs and Tax Act. The new tax changes will have less marginal tax rates with a lower percentages within each of the different rates.

The chart below will explain the rate and the percentage amounts.

The major component of the Jobs and Tax Act will have a significant change to small business owners. There is a component inside the new rules to apply a 20% deduction for qualified businesses income (QBI) but with some income limitations.

2018 Standard Deduction and Exemptions.

The new tax rules also make big changes to the standard deduction and exemptions.

The standard deduction in 2018 as the law currently exists is $13,000 for a couple filing jointly. That number will jump to $24,000. For single filers it jumps from $6,500 to $12,000.

The personal exemption, currently at $4,150 for 2018, would be repealed. That’s the bad news. The good news the child tax credit gets a big boost.

Child Tax Credit.

It currently sits at $1,000 and starts to phase out at $110,000 in income for couples and $75,000 in income for everybody else. Under the new law, the credit doubles to $2,000, $1,400 of which is a refundable tax credit. Further, it doesn’t start to phase out until $400,000 in income for couples and $200,000 for singles.

2018 Itemized Deductions.

Several key changes are coming for itemized deductions. State and local taxes can still be itemized, but they are now capped at $10,000. This concession attempts to address the uproar from states that levy big taxes on their citizens.

Interest on mortgages for primary and secondary residences is still deductible. The limit, however, has come down from loans up to $1 million to loans up to $750,000.

Medical Expenses.

Medical expenses in 2017 and 2018 are deductible to the extent the exceed 7.5% of income (down from 10%).

Further study.

The IRS has built in an inflation rate increase into the new tax rules just like it had in the past. Here are the adjusted rates:

The standard deduction for single taxpayers and married individuals filing separately is increasing $200 to $12,200, and for married individuals filing jointly, the increase is $400, up to $24,400. The standard deduction for heads of households will be $18,350, a $350 increase.

The tax brackets have also been adjusted slightly for inflation:

The Alternative Minimum Tax exemption amount is $71,700 and begins to phase out at $510,300 for single taxpayers ($111,700 for married couples filing jointly, where a phase out begins at $1,020,600).

The Earned Income Credit amount is $6,557 for taxpayers filing jointly who have three or more qualifying children, up from $6,431 for tax year 2018.

The monthly limit for the qualified transportation fringe benefit and qualified parking benefit is $265, up from $260. The limit for employees’ contributions to health flexible spending arrangements increased $50 to $2,700.

The “individual mandate,” the penalty for not maintaining minimum health insurance coverage, has been eliminated under a provision of the Tax Cuts and Jobs Act.

As continue our discussion the reduction of income tax we go into detail how to do just that. Reducing income taxes. We have a complete set of tools for business owners to implement to eliminate self-employment taxes and reduce income taxes with proven strategies.

The Art of Planning – The True Meaning of Success we will be very descriptive on how to implement a complete and comprehensive set of strategies to reduce income taxes.

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