Jack TenneyExtra Point

by Jack Tenney, Publisher

November 2017

Like many, I am trying to get my head around the implications of federal income tax reforms.

I kind of get the big picture: corporate rate reduction to maybe as low as 20 percent and simplification of personal brackets from a ton to a few; the standard deduction will maybe double, and itemized deductions for state taxes and mortgage interest might be curtailed or modified; federal estate tax and minimum alternative tax will go bye-bye; the so-called pass-through rate will be the corporate rate.

The goal is for everyone to pay lower taxes, and corporate rates and rules will bring back jobs lost to low-tax countries.

What’s not to like, right? Depends, I would say, on whether you’re part of the “gig” economy and, if so, how well is that going.

Comparing single taxpayers with gross incomes of $40,000 in 2016, one an employee, the other a self-employed “gigger,” the employee nets more (like $5,162 more) chiefly because the gig-dude has to pay both ends of FICA and Medicare taxes. In 2017, with the tax rate on the two dropping and the standard deduction doubling, they both would keep a touch more than a thousand compared to 2016.

Throwing a quick calc at the proposed effect on a “small-business” person reporting $400,000 income in 2016 and again in 2017, there appears to be $47,032 of good news, were the rate to go to 20 percent.

Back in the old days before sub-chapter S corporations, owners of businesses liked to pay themselves huge salaries to escape the 50 percent corporate on earnings in excess of $25,000. Of course, then they sheltered the personal income with investments in oil exploration and the like. The IRS challenged this approach to tax-avoidance (none dared call it evasion), saying the owner’s salary was really a dividend. If the IRS won the argument, both the owner and the corporation got killed, with the corporation paying 50 percent plus penalties and interest, and the owner still needing to shelter the income.

I assume the tax bill writers will have some sort of remedy. Imagine if the $40,000 “gigger” elected sub-S corporate status and avoided more than $6,000 self-employment taxes.