How Wealthy Americans Are Already Trying To Game Trump’s Tax Bill
Earlier this month, Trump touted the idea that, under his tax plan, 1,000’s of Americans would be able to “file their taxes on a single, little beautiful sheet of paper.” Of course, this so-called “postcard” that Trump and Paul Ryan have referenced repeatedly over the past several months is basically nothing more than a 1040EZ shrunken down to fit on a smaller piece of paper but who are we to rain on their parade?
That said, while many Americans will enjoy an easier tax filing in 2018, or at least as easy as the 1040EZ, others, especially high-income folks living in high-tax states like New York and California, are suddenly scrambling to retain accountants to figure out how they might best game the new tax code to avoid higher rates.
Of course, one of the key opportunities for ‘gaming’ results from the new taxation rules for “pass-through” entities. Unlike high-income earners filing as individuals who lost a substantial portion of their deductions, pass through entities, with the exception of certain professionals like doctors, lawyers and stockbrokers, are still eligible for a 20% deduction from their earnings. To put that into perspective, a 20% deduction reduces Trump’s top marginal tax rate for pass-through entities to 29.6% from the 37% that will be paid by individual filers.
Not surprisingly, as CBS points out, the change has pretty much everyone suddenly plotting a post-holiday discussion with their boss to see if they can be fired and promptly re-hired as an independent contractor.
First, you convince your boss to let you quit and hire you back as a contractor after you’ve set yourself up as a sole proprietorship. Assuming you can do that and your tax treatment is better, you can offer your ex-employer the same services for less — the company does not have to worry about giving you benefits or paying its share of your Social Security and Medicare taxes. That latter part is the iffy one for you, and the numbers would have to work out. “Do you really want to go without health care and a 401(k)?” asked online financial adviser group Betterment’s tax expert, Eric Bronnenkant.
Meanwhile, even lawyers, who are specifically excluded from the pass-through rules, could qualify by leaving their law firms and pursuing a position as an in-house counsel.
An end run works like this: A law partner, sick of the barricade to a kinder tax rate other pass-through people enjoy, moves over to be in-house counsel at an engineering firm, which is not on the ban list. “Now she’s no longer in a specified service,” wrote Ari Glogower, a law professor at Ohio State University, on Vox.com. “Voila, she may qualify for the pass-through deduction.”
As we pointed out earlier this week (see: Why Wall Street Is Furious At The Trump Tax Plan), for others who can’t game the pass-through system, like most of the traders earning big bucks on wall street, the best option might be to simply move from New York to a lower-taxed state like Florida or Texas.
Still others are considering a move to lower-taxed states like Florida and Texas which, as Todd Morgan, chairman of Bel Air Investment Advisors in Los Angeles notes, sounds like a great idea right to the point that you realize that actually entails uprooting your entire family and starting a whole new life in a different part of the country…something that generally doesn’t go over well with teenage kids…”If you’re already rich why would you move to another state and live a different life just to save some money on taxes? What are you going to do with the money? Buy more clothes? Eat more food?”
Finally, the tax bill could even influence decisions on if/when people decide to get a divorce. As Bloomberg points out, starting January 1, 2019 divorce suddenly becomes way more attractive for the recipients of alimony and punitive for payers as the payments will not longer be counted as income or allowed as a deduction.
Tax considerations are even changing for those getting a divorce.
Under the law, divorced taxpayers who pay alimony would no longer be able to deduct those payments from their income, and recipients of alimony would also no longer need to report the money as income. However, the provision doesn’t go into effect right away and instead applies to divorces finalized after Dec. 31, 2018. So, depending on whether you’re set to pay or receive alimony, you might want to speed up or slow down those divorce proceedings.
…which may or may not have been a clause specifically added by Melania…