During the 2016 presidential election, Donald Trump pledged to rewrite America’s tax code, with the goal of making “America prosperous again.” Now that he’s in office, Trump is ready to make those promises a reality.
This is the final installment in our three-part series examining Trump’s tax plan and its impact on real estate agents. We have looked at the proposals and their impacts, including some deductions and tax breaks that could be history.
Today, we look at the business tax proposal and how it will impact agents. As it currently is proposed, Trump’s plan could mean more profit for agents, but only if they create a business entity.
Trump is hoping that a huge tax cut will spur economic growth and make U.S. businesses more competitive internationally. Stephen Moore, an economist at the Heritage Foundation, advised Trump’s campaign and helped craft his tax proposal.
“Conservatives are going to be very happy with this plan, because it achieves a lot of the objectives that we’ve wanted: lower business taxes, simplification and not a major tax increase that is unacceptable.”
According to a report by Inman News, agents with $100,000 in business income would take home 6.2 percent more under the Trump business tax proposal.
According to the plan, Trump would apply a 15 percent rate to income from so-called pass-through entities as well corporations.
Pass-throughs make up the majority of U.S. businesses. They don’t pay tax directly, but rather pass their profits through to their owners, partners and shareholders. They, in turn, pay tax on those profits on their personal returns at their individual income tax rates.
However, the gap between the top wage rate and the top business rate may tempt some tax payers to convert as much of their ordinary income into business income as possible, saving them $20,000 for every $100,000 subject to tax.
Moreover, they also can save money because they also would avoid the 2.9 percent Medicare tax owed on wage income.
Under current laws, real estate agents are taxed at their personal rates rather than the current business rate of 35 percent, unless a real estate business is a C corporation. According to Inman News, this fits the classification of a “pass-through” business. Small businesses, like real estate agents, can avoid double taxation and, in most cases, lower taxes.
Real estate agents who have a business set up as an LLC, S corporation or partnership are a pass-through entity.
Treasury Secretary Steven Mnuchin has promised that rules would be created to prevent people from abusing the pass-through structure just to slash their tax bills. But the good news will be that the proposal does away with the current pass-through structure and goes with a 15 percent flat rate for these types of businesses.
Real estate agents can set up their business to get the 15 percent tax rate. It may be a goal that ever agent should consider.
We are not tax attorneys or accountants. Always consult a professional for advice on your individual situation before taking action.