How Uber and Lyft Drivers Benefit from Trump Tax Plan
Trump passed one of the largest tax reform bills in the past 20 years and it will have a large impact specifically to Uber and Lyft drivers. The Trump Tax Plan only affects income in 2018 so this won’t impact your current tax returns on 2017 income. However, this gives Lyft and Uber drivers a bit of time to adjust to the new tax plan.
The main impact of Trumps Tax plan on Uber and Lyft drivers is that there is a 20% deduction on pass through income. All Uber and Lyft drivers are considered self employed contractors who can also be considered a business. The default business structure for Lyft and Uber drivers is a sole proprietorship and it is typically registered under your social security number. Sole proprietorships are considered a pass-through entity since income follows through the sole proprietorship to the recipient and taxes are levied on the recipient’s rather than at the business level. The Trump Tax Plan has essentially gave Lyft and Uber drivers a 20% deduction on their taxes.
If you are single or married with no kids, no house, and pay little state income tax, you essentially received a 20% reduction of your taxes from Uber and Lyft income purely based on the 20% deduction on pass through income. The other main changes in the Trump Tax Plan is the doubling of the standard deduction, reduction of tax rates in the middle brackets, removal of the personal exemption, and limit of deduction for State and Local Taxes (SALT).
Here are some factors that will positively affect Lyft and Uber drivers next year:
Increased Deduction for Pass-Through Income
The Trump Tax Plan allows for a 20% deduction of pass-through income. There is a rule in here that limits the deduction of pass-through income to 50% of wage income to prevent someone from re-characterizing their income from wage income to pass-through income. When I first started Lyft and Uber, I also had a separate full time job. At this time, I am unsure if this 50% rule applies to Uber and Lyft drivers who have full time jobs that are not related to Lyft and Uber. Since the rule states wage income, any W2 job may fall under wage income and you will be limited to deducting 20% of the 50% of the wage income. By the time you prepare your tax returns in January 2019, your tax preparer or TurboTax will have figured out all of this so you can use their software to figure out how much income you can deduct.
Increase of Standard Deduction
The biggest part of the Trump Tax Plan is the doubling of the Standard Deduction from 6500 to 12000 for single filers and from 13000 to 24000 for married couples filing jointly. While this is great for some people since it lowers their taxes, it may not be so good for others since it essentially makes it more difficult to itemize deductions since your itemized deductions will not exceed the standard deduction.
Lower Tax Brackets
The Trump Tax plan lowered the rates of some of the tax brackets. The tax cuts seem to affect low income earners a bit more than high income earners purely based on just the tax brackets alone. Take a look at the below calculations:
You can see that if you make 40k a year as a single filer, you will get about a 17.4% cut in your federal taxes, assuming that everything else on your tax return remains the same. You can see a similar trend in people who file as married filing jointly:
Married Filing Jointly
I essentially doubled the income from single filers and did a similar calculation.
Here are some factors that will negatively affect Lyft and Uber drivers next year:
Elimination of Personal Exemption
The personal exemption is something you can claim for someone on your tax return, such as a child or dependent (other than your spouse, regardless of your feelings towards how dependent they are on you.) Starting 2018, you will no longer be able to claim a personal exemption. The increase of the standard deduction does offset this somewhat if you have only one or fewer personal exemptions, but you will pay more taxes if you have two or more personal exemptions. For those who file as married filing jointly, the increase of the standard deduction is 6500. The personal exemption was set at 4150 for 2018. If you have one exemption, you will still gain about 2250 in additional deductions. If you have two exemptions, you will lose 1800 in deductions.
Limit on State and Local Taxes (SALT) Deductions
The cap on deductions for state and local taxes is now $10,000. This will mostly affect drivers in California and New York due to their high state income taxes but may affect you in other states if you have high property taxes like in New Jersey, New York, Texas and Florida. If you live in a condo that is assessed at $500,000, you’ll hit the cap on SALT with a 2% local property so it is very possible that you’ll take a small hit when you hit the cap on SALT deductions.
Limit on Deduction of Mortgage Interest
For those who are married filing jointly, you can take the mortgage interest deduction if your property is worth under $750k, which is lower than the current limit of $1 million. This should affect only a small percentage of the population in the US but possibly a decent percentage in places like California, Seattle and the North East (NY, NJ, CT, MA).
How Much Do You Save on Taxes?
This is a very difficult question to answer since everyone’s tax situation is different. I can do the best case scenario below:
Single Filer, full time Uber Driver making $40k a year with no State Income Tax with no kids or house
They will get a 20% pass-through income deduction, about a 15% deduction on federal income taxes, and the increase from the personal deduction. This person may get about a 30% reduction of their taxes.
This Tax Plan is Temporary
I would argue that many Uber and Lyft drivers will get a slight reduction of their taxes due to the deduction on pass through income. If your taxes end up increasing, remember that it expires in 8 years so you won’t have to deal with it for that long. Since the tax plan affects income for 2018, we can start toHave more questions about Uber or Lyft? Head on over to our Rideshare Driver Training Course! Driver Promotions