Entries Tagged 'Taxes' ↓

The GOP  ‘tax reform’ bill in the U.S. Congress purportedly contains a clause that will raise the standard tax deduction rate from $6,300 to around $12,200. That’s almost double. Don’t think this will save you a huge chunk of money!

Doubling the Standard Deduction

This supposed benefit will kill off self-employment and Social Security with one stone. But not in one year. Only after years of erosion will working people realize how they’ve been tricked.

Doubling the standard deduction on federal taxes paid by employed and self-employed people will raise the US government deficit too. Who is going to make up for the loss of tax revenues from increasing the standard deduction? Certainly not corporations and not the tiny number of individuals making large sums of money off of investments and real estate.

The Impact on Self-Employed Workers

This year – with regular standard deduction

Let’s say a self-employed professional, such as a freelance book editor, or a beautician or bookkeeper makes $35,000 net business income this year.

Currently, a self-employed person we’ll call Jan, would have to pay 12.4% of $35,000 for SE (self-employment tax). That comes to minus $4,340 SE tax.

Deduct $4,340 for SE tax from $35,000 and we get $30,660. This is Jan’s net business income which goes on Form 1040 as personal income from business.

The present standard deduction on personal income is $6,300. So we subtract $6,300 from $30,660 and Jan has $24,360 taxable personal  income.

Now subtract $4,500 for Jan’s individual personal exemption and Jan’s taxable income drops to $20,310

Jan’s $20,310 personal income is taxed at 15.3% and the government gets $3,107 in personal income tax from Jan. 

 Jan gets to keep $27,553 out of the $35,000 earned by the business ($30,660 after SE tax paid – $3,107 personal taxes)

Note: Self-employed persons pay twice as much SE tax as employees pay for FICA tax. Both taxes go toward Social Security and Medicare. (Employers pay for half of employees’ Social Security and Medicare taxes)

Self-employed people making under $127,200 a year of net business income must pay the full SE tax rate. However, the IRS does not levy income tax on the amount of earnings paid for SE tax. That would be double-taxation on the same money. Instead, self-employoed individuals get to deduct half of the SE tax from their net business income and half from their net personal income taxes.

Because self-employed pay the full SE tax, many self-employed persons will be far more negatively impacted by doubled standard deduction on personal taxes than employees. This bill will destroy many self-employed businesses. Continue reading →

Like most Americans I’ve heard of VAT taxes, but I didn’t really understand how they work. The difference between VAT and sales taxes is important though when it comes to President Trump’s policies on immigration (“Trump’s Wall”) and his proposed “border adjuestment taxes” on Mexican imports to the US.

VAT compared with US sales tax

Continue reading →

Now that the US Presidential election is decided, it’s time for us all to try to anticipate what it might mean for each of us. For some, inflation would be a good thing; for others it won’t be. You know what it would mean for you.

Many people, and particularly investors, seem to be convinced that Fed raises in interest rates will bring on inflation. Why? That’s what has happened in the past.

But we are in a whole new world right now. A world that will be hugely shaped by Donald Trump and company. And by robots which Oxford University experts expect “will replace almost half of all American jobs in the next two decades.”

During his campaign, Donald Trump counted on corporations’ ability to step up and provide new jobs for Americans via funding infrastructure projects using their own money.

Trump soon ran into trouble, halving his estimated spending on new jobs from $1 trillion into $500 billion. My last post, “The Emperor Has No Clothes,” explained why even that estimate might be too much.

The Fed is hoping that an interest-rate rise in the cost corporations pay to borrow capital will bring on a cycle of new investment by corporations. But right now, making capital more expensive will not encourage corporations to spend more.

As of spring 2016, 99% of 2,000 US corporations were deeply in debt. Only 25 large companies hold half of all US corporate cash. Even the amount of cash the richest companies hold is nowhere near the billions of dollars needed for new jobs. Continue reading →