3 Ways the New Tax Law Will Impact Your Taxes … and When They Take Effect
Freelancers and independent contractors will see changes to tax rates and deductions next year, with some mandates still in effect now.The Tax Cuts and Jobs Act was signed into law by President Trump in December, bringing significant changes to U.S. tax law. However, these changes will be rolled out at different times: While some, like changes to payroll withholding, may already be in motion, others won’t affect your tax return or total bill until next year.
Here are three key ways that freelancers and independent contractors will be impacted by the new tax bill, and when each will take effect.
Pass-Through Income DeductionA new pass-through benefit will reduce the business income you pay taxes on by up to 20% — starting with tax year 2018. If you’re a partnership, S corporation or sole proprietorship (freelancers are usually considered the latter), your business income is likely to qualify for the new deduction on “pass-through” business income.
While this change was designed to help small businesses, it will also benefit freelancers and independent contractors in many fields. You can take it even if you also take the standard deduction.
However, high-earning self-employed professionals in “service fields” (like healthcare, accounting and law) who earn more than $157,500 single or $315,000 couple from all income sources will see the benefit phase down after those thresholds. Dividends and interest from personal investments like stocks and bonds also aren’t eligible.
Still, most self-employed professionals could see significant savings when they file their taxes next year. Sadly, there will be no change in the tax burden on this year’s returns.
Lower Rates & Higher DeductionsYour tax rate may be lower and standard deductions higher — starting with tax year 2018. The new tax law will change tax brackets (what percent of your income you owe in federal taxes, based on your income level). All brackets will remain the same or become lower than previous years, so you should avoid any increase regardless of your income.
However, changes to tax brackets and the standard allowed deduction per person do not apply to the 2017 tax year; they’ll factor in for the first time when you file next year.