On December 22, 2017, President Donald Trump signed into law the first tax overhaul legislation in more than 30 years. There’s been much talk about how the tax law could impact large corporations. But what about smaller businesses such as insurance brokers?
Most people in personal services, such as realtors, architects, and insurance brokers, fall into the category of pass-through businesses. This means, instead of paying a corporate income tax, the business owner reports—or “passes through”—the profit as personal income.
The new tax law directly affects the tax returns for these types of entities, which make up 90 percent of all U.S. businesses. In 2014, almost 40 million taxpayers claimed this designation on their individual tax returns.
How Will the New Tax Law Affect Insurance Brokers?
Insurance brokers can take advantage of the 20 percent tax deduction as long as their annual income is below $157,500 for single filers and $315,000 for joint filers. That means if your annual income is $100,000, you’ll be taxed on $80,000.
The deduction was created with the hope that company owners will reinvest their savings into their businesses. With more than 70 percent of small businesses owners making under $200,000 per year, the measure could have a big impact on the nation’s small business community.
How 20 Percent Could Become 29.6 Percent
The new tax law provides large C-corporations with a 21 percent tax rate on their income, making the small business deduction of 20 percent seem skimpy at first glance. But the tax law also includes a lower rate on taxable income.
If you combine the 20 percent deduction with the lower top tax rate, pass-through business owners could lower their tax bill by as much as 29.6 percent, according to a Wall Street Journal analysis.
The deduction should be available to most insurance brokers, but make sure you consult with a tax expert. There are exceptions for S corporations, which most personal service businesses fall under, and some types of capital investments.
The information in this article is not offered as legal or tax advice. We suggest you seek the advice of your tax advisor, attorney, and/or financial planner to make certain you obtain the tax deduction(s) you are entitled to. All material is presented solely as educational information.
Sources: http://time.com/5077411/donald-trump-signs-tax-bill/ | https://www.forbes.com/sites/ryanellis/2017/11/27/the-senate-tax-reform-bill-cuts-rates-for-small-businesses-and-flow-through-firms/#69132424929f | http://www.businessinsider.com/small-business-effect-of-trump-gop-tax-bill-2017-12 | http://www.foxbusiness.com/markets/2017/12/28/what-tax-reform-really-means-for-small-businesses.html | https://www.businessnewsdaily.com/10357-small-business-tax-reform-changes.html | https://www.nytimes.com/interactive/2017/12/20/us/politics/small-business-tax-cut-pass-throughs.html | https://www.forbes.com/sites/robbmandelbaum/2017/12/22/what-the-gops-final-pass-through-tax-cut-means-for-business-owners/#6f7d005452b2 | http://fortune.com/2017/12/20/gop-tax-bill-brackets/ | https://www.wsj.com/articles/what-the-republican-tax-plan-means-for-business-1513380120 | https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations