Neil Irwin reports that if the Trump administration’s tax plan were to become law, in the future a whole lot of people may just become corporations. That’s because of a huge loophole implied by the broad tax ideas the administration recently released. Unless revised in actual legislation, the plan would give millions of Americans the opportunity to cut their taxes by essentially turning themselves into small business entities.
The opportunity to game the system arises from the huge gap between the tax rate paid on individual income — up to 39.6 percent now, or 35 percent under the Trump plan — and the low rate on business income the president proposes, of 15 percent. He seeks to apply that rate to all businesses, including “pass-through” organizations such as limited liability companies and S corporations, and that is where the opportunity for games arises.
Under current law, an individual would pay the same taxes on that business income that they do on personal income, but in important ways would be worse off. But under the Trump tax plan, their tax rate would fall to 15 percent from 28 percent, saving thousands of dollars a year — enough to justify those annoyances.
Posted by Jacqueline Groccia, Associate Editor, Wealth Strategies Journal.