First, I am not a tax expert.  Everything below is from my own research.  I am a Strategic Commercial Mortgage Broker that wants to know how investments are affected in many ways.  So, as you review below, please get a tax professional’s advice before you embark on a direction.  Okay, disclaimer over!

In my review, it appears that W2 wage earners will have less planning to do than the self-employed.  So, my focus is on planning for the self-employed in this note.

Here is my suggestion.  Open the Wall Street Journal Tax Calculator (if you are not a subscriber, then you might have to find a way to get to it through Facebook.  Log into your FB account and then try using this link in Facebook;  and then choose the calculator).  Assuming it is accurate, then you might start to understand what might affect your taxes the most.  Pull out your tax information from previous years to complete the various entries.  What became extremely clear to me is the Pass-Through Income line item.  Then one has to know whether or not they are included in the Non-Service or Service category.

This seems to be the most important classification.  And, it is not totally clear.  I grabbed this excerpt from this article in Forbes.

“Then there are the disfavored trades.  If that is what you are doing you get no benefit once you are past the phase-out.  Most of them were cribbed from a list in another part of the code (1202(e)(3)(A) if you must know):

business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.  Only for whatever reason, they dropped engineering and architecture from the list.” 

If you fall into the above category, then you are considered a “Service” trade.  And then the benefits phase out once single filers exceed $157,500 and joint filers exceed $315,000.  The articles I have read stated that further clarification is expected to help clear the confusion regarding this particular item.

I tried a lot of scenarios with the calculator; and I found that higher income earners will be substantially affected by how their pass-through income is classified.  My goal here is to get you informed for both yourself and your clients.  I hope you find this a good start.  Make sure you touch base with your tax expert to better understand what this all means to you.  Planning now will limit surprises later.  If there is some way to get classified as a non-service business, then the savings could be huge.

Oh, another big item that is now tough on the self-employed is the change in the deduction of meals and entertainment.  For the most part, it is now GONE!  Do your own research, but here is a link that supports my conclusion.

Note that there may be some options available in the area of entity formation.  Whether or not becoming a C-Corporation is advantageous is not clear to me at this time.  I know the tax reform was supposed to make things simpler, but, so far, that does not seem to be the case.

Okay, I want to get back to my weekend here.  As always, I welcome any comments.  If you have all of this figured out, then feel free to send me a note/article; and I will be happy to share it with all as appropriate.

That’s it for this week.  As always, feel free to give me a call with any of your strategic financing needs.