In case you missed it due to the holiday rush, the President recently signed into law the Tax Cuts and Jobs Act (TCJA), representing the broadest reform of tax laws in three decades. With the new laws now taking effect, you’ll notice both some individual and business tax “goodies” and some less appealing regulations. Suffice it to say, the TCJA will impact you as a freelance professional. Here’s a quick rundown of the high (and low) points that are most relevant to the freelance business community:
Tax Reform Positives for Freelancers
- Potentially lower tax rates. One of the benefits of the TCJA, for some individuals, is a lower tax rate. There will be seven individual income tax brackets under tax reform: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- A new pass-through credit for self-employed freelancers. Perhaps the crown jewel for many business owners is the much-touted 20% qualified business income deduction for pass-through entities such as partnerships, S-corporations, and sole proprietorships. If your freelance business is structured as one of these entities and your income is under $157,500 ($315,000 for married filing jointly), you are likely eligible for this benefit which is subject to phase-out.For C-corporations, the tax rates will range from 15% to 35% will be reduced to a flat 21% rate under the new law.
- The repeal of the Affordable Care Act’s individual mandate and associated tax penalties. Under the TCJA, starting in 2019, taxpayers will no longer face the levy of $695 per person or 2.5 percent of income, whichever was higher, if they choose not to carry health insurance.
- An increased standard deduction. You’ll see below that many long-standing deductions have been eliminated under the new tax laws. However, likely in an attempt to simplify tax deductions, for the most part itemized deductions have been eliminated in exchange for larger standard deductions, effective in 2018: $12,000 (single and all other taxpayers); $18,000 (head of household); $24,000 (married).
- The preservation of some key deductions including the a) medical expense deduction, which allows people whose medical expenses represent more than 10 percent of their income to deduct those costs. The TCJA improves the provision so you can deduct medical expenses if they equal more than 7.5 percent of your adjusted gross income (AGI) in 2017 and 2018; and b)student loan interest deduction which remains intact, meaning that student loan borrowers can still deduct up to $2,500 of the interest they paid directly from their taxable income.
The Lower Points of Tax Reform for Freelancers
While there are some good things in the new tax laws, there are also some mandates that are bound to take the smile off the face of the average taxpayer. Many of these have to do with the elimination of some key tax deductions and new restrictions on other important deductions such as:
- Meal costs are no longer deductible by employers. Along with business entertainment deductions (see below), there are changes to deductions for meal expenses for businesses under the TCJA. While individual taxpayers are still generally able to deduct 50% of the food and beverage expenses for meals consumed during work travel, for meal expenses incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the TCJA expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringe benefits and for the convenience of the employer. Therefore, these amounts incurred and paid after 31, 2025, will not be deductible.
- Reduced deductions for state and local taxes. Under the TCJA, individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes.
- Mortgage interest will be deductible only on new mortgages of up to $750,000.
- There are no longer any deductions for the interest paid on home equity loans.
- No moving expenses can be deducted for tax purposes. The TCJA suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and suspends the tax-free reimbursement of employment-related moving expenses.
- Deductions for business entertaining are gone. Businesses have typically been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. However, under the new law, for amounts paid or incurred after December 31, 2017, there’s no deduction for such expenses.
- A higher alternative minimum tax exemption amount may eliminate certain deductions. The new tax law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. Some deductions, such as depreciation and the investment interest expense deduction, will be curtailed if you are subject to the AMT. If the higher AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed investment transactions, to push such deductions into 2018.
No matter how you feel initially about the new tax laws, be aware that many of these tax reform provisions are applicable only through 2025. As such, it is advisable to talk with a tax professional to see if you need to make adjustments to your business structure or your personal tax situation in order to lower your tax burden. Fully understanding the impact that tax reform will have on you and your freelance business is the key to successfully navigating these changes now, and in the tax years to come.