The proportion of your personal income that goes to the government will be determined by the income tax rates and your income tax bracket. As a small business owner, you can use projections to assist you as you plan and budget for your taxes.
How your business structure affects your income tax
When it comes to taxation, the majority of businesses are flow-through entities. For sole proprietorships, LLCs (limited liability companies), partnerships (plus limited partnerships), S-Corporations, the business itself does not pay tax. Rather, the owners declare the income received from the business operations and calculate the appropriate tax based on the specified tax brackets.
The anticipated tax rates and tax brackets are summarized here to assist you, together with your accountant, to devise the most cost-effective plan for 2017.
How income tax brackets are selected
The IRS relies on the Consumer Price Index (CPI) when making adjustments to the taxation laws. The CPI is an indicator of the cost of living and inflation. Variations in the CPI can affect:
- tax brackets
- income thresholds
- credits and exemptions
A rise in the CPI causes the tax brackets to move. If your salary remains at the same level, you can move to a lower tax bracket and reduce your tax liability.
Bloomberg BNA’s tax specialists have issued their projections for US tax rates in 2017. When adjusted for inflation, the projections indicate that some taxpayers will shift to different tax brackets which will reduce their income tax rates.
Anticipated individual income tax brackets
Taxable income is considered to be your earnings from business or employment, investment income, gambling, rental income, awards and various business activities. It excludes inheritances or gifts, specific educational funds, workers compensation or payments from accidents.
Taxable income can be divided into seven brackets, and each bracket is taxed using a different rate. The 2017 projections for income tax brackets and the corresponding rates are:
For single individual taxpayers (apart from surviving spouses and heads of households):
- from $0 to $9325, the tax rate will be 10 percent
- from $9,326 to $37, 950, the tax rate will be 15 percent
- from $37,951 to $91, 900, the tax rate will be 25 percent
- from $91,901 to $191, 650, the tax rate will be 28 percent
- from $191,651 to $416, 700, the tax rate will be 33 percent
- from $416,701 to $418, 400, the tax rate will be 35 percent
- over $418, 400, the tax rate will be 39.6 percent
The proportion of your income that fits into every tax bracket is taxed using the respective rate. Therefore if your taxable income amounted to 85000:
- from 0$ to $9,325, you will be taxed at 10 percent;
- from $9,326 to $37, 950, you will be taxed at 15 percent;
- and from $37,951 to $85,000, you will be taxed at 25 percent.
If you are married and filing your returns jointly or you are a surviving spouse:
- from $0 to $18,650, you will be taxed at 10 percent;
- from $18,651 to $75,900, you will be taxed at 15 percent;
- from $75,901 to $153,100, you will be taxed at 25 percent;
- from $153,101 to $233,350, you will be taxed at 28 percent;
- from $233,351 to $416,700, you will be taxed at 33 percent;
- from $416,701 to $470,700, you will be taxed at 35 percent;
- and over $470,700, you will be taxed at 39.6 percent.
If you are Head of household:
- from $0 to $13,350, you will be taxed at 10 percent;
- from $13,351 to $50,800, you will be taxed at 15 percent;
- from $50,801 to $131,200, you will be taxed at 25 percent;
- from $131,201 to $212,500, you will be taxed at 28 percent;
- from $212,501 to $416,700, you will be taxed at 33 percent;
- from $416,701 to $444, 550, you will be taxed at 35 percent;
- and over $444, 550, you will be taxed at 39.6 percent.
You accountant can try to reduce your taxable income by recommending that you make pre-tax-contributions by, for example, investing in 401(K) plans or using flexible spending accounts.
Income tax deductions and exemptions
Nearly all taxpayers in the US get an automatic personal exemption amounting to $4,050. This exemption starts to phase out once your adjusted gross income (AGI) exceeds $261,500 (and $313,800 for couples that file returns jointly). You lose the personal exemption completely when your AGI is $384,000 (and $436,300 if you are married and filing returns jointly).
You are allowed to claim a deduction in addition to your exemption. The easiest deduction to claim is the standard deduction. This is the standard deduction that you are entitled to:
- $12700, if you are a married couple;
- $12700, if you are a surviving spouse;
- $9350, if you are head of household;
- $6350, if you are any other type of taxpayer.
You might be able to receive a bigger deduction if you opt to itemize your tax-deductible expenses. This may be beneficial for individuals with:
- diverse income from real estate and investments
- medical or business expenses
If you decide to follow this method, it is prudent to consult a tax professional for advice.
Alternative Minimum Tax (AMT)
The alternative minimum tax has been put in place in order to make sure that high-income earners pay a minimal tax amount. It is applicable when one’s income level reaches a specified amount. According to the tax experts at Bloomberg BNA, here are the projected AMT exemptions:
- an exemption amounting to $84,500 for married persons filing joint returns or surviving couples
- an exemption amounting to $54,300 for unmarried persons (apart from surviving spouses)
- an exemption amounting to $42,250 for married persons filing separate tax returns
- an exemption amounting to $24,100 for trusts and estates
Exclusions for estate and gift taxes
During 2017, it is projected that basic estate tax exclusion will rise marginally to $5.49 million. It is also anticipated that the annual gift tax exclusion will be $14,000.
Income tax brackets and tax rates continue to change
Depending on the correlation between your CPI and income, your tax exposure may vary from year to year. It is always worth it to reflect on where the tax brackets could fall.
A tax expert, for instance, an Enrolled Agent or a Certified Public Accountant (CPA), can assist you to reduce your tax liability and at the same time ensure that you remain compliant with state and federal laws and regulations.