If you don’t have “pass through” income, then you may be one of the big losers in the so-called 2017 tax reform passed by Congress and signed by President Trump. But another way, if you DO have pass-through income, you are a big winner. So who has pass-through income? Guess. If your first guess is real estate investors then you win the gold ring. Real estate moguls be reaping a windfall, according to Fortune Magazine. In fact, under the Trump tax plan, loopholes for real estate investors like him and his son-in-law Jared Kushner will be bigger than ever. All versions of the Trump tax plan have included some type of break for “pass-through” businesses, so-called because their profits are passed through to their owners and subject to the personal income tax rather than the corporate income tax.
One analysis by a dozen tax professors and reported by Barron’s Magazine found that the pass-through deduction and the new lower corporate rate created multiple potential loopholes. And in an op-ed piece penned by two law professors for the LA Times, new tax deduction disproportionately benefits the wealthy, penalizes workers and will ultimately reward those who can afford the best tax advice. As they explain it, the new deduction allows people with pass-through income — profits from a partnership or sole proprietorship, for instance — to write off 20% of that income before calculating their taxes. They assert that President Trump, for one, stands to gain significantly. He reportedly owns more than 500 large, pass-through real estate firms — just the type of business that would qualify most easily.
It turns out that pass-through business income is concentrated among the country’s highest earners. The top 1% currently earns less than 12% of labor income, but more than 50% of all pass-through business income. By slashing taxes for pass-through businesses, the deduction will exacerbate our widening income gaps.
Here’s the tricky part of this new loophole: the law is so poorly drafted, and its objectives so unclear, that it isn’t entirely clear as to whether or how you can qualify for a pass-through deduction. So you’d need to pay a hefty fee to legal and accounting firms to figure it out. And guess who has the money to pay for this advice? It will reportedly take the IRS and Treasury Department many years to clarify exactly how the pass-through loophole works. By then, the new deduction will be on the verge of expiring, creating further uncertainty and risks for regular employees. In the meantime, some of the richest Americans who can afford this professional guidance will most assuredly get richer.
The pass-through loophole is only one of an extensive list of new loopholes created in this hastily-drafted, back-room dealt law. Slate Magazine dives deep into the disturbing details about how the new law will benefit the few and cost the many. A group of 13 tax law professors and lawyers, many of whom have been vocal opponents of the Republican plan, published a 34-page paperoffering a taste of what those unintended consequences might be. Some of the issues the professors found aren’t loopholes so much as unintentionally perverse incentives that could, for instance, encourage companies to shift employment and investment overseas (which is the exact opposite of what this bill is supposedly intended to do). With no regulations, no form instructions, and most unfortunate of all, no one who helped craft the bill or vote on the thing who actually understands what it says, it may be a while before clarity is forthcoming……and only the wealthiest tax payers will have the ability to navigate this impossibly complicated new loophole. That’s just a taste of how ugly this new tax “reform” is going to be.