Minimum Wage Increase & Tax Changes

new tax changes

On May 25, President Bush signed a bill that included a minimum wage increase as well as a few tax provisions.

Federal Minimum Wage Increased: The federal minimum wage will increase to $7.25/ hour over the next two years. The federal minimum wage has been at $5.15/hour since 1997. Under the new law, it will increase to $5.85 next month. It will then increase to $6.55 next July and to $7.25 in July 2009. Of course, some states are already far ahead of the curve on minimum wage rules, but for those that aren’t, minimum wage employees can expect some pay raises in the near future.

Kiddie Tax Rules Expanded We explained the kiddie tax rules in a previous post. Just when you think you have it all figured out, the tax law changes. With these revisions, the kiddie tax rules are now applied to children up to age 18 (instead of age 17). They also now apply to full-time college students, up to age 24, who provide less than half of their own support. This significantly limits the ability of families to transfer wealth to their children in order to avoid higher tax rates.

Small Business Tax Break: Section 179 deductions for fixed assets were extended through tax year 2010 and were increased to a limit of $125,000 annually. Section 179 deductions are a huge tax advantage to small businesses, as the rule allows businesses to write-off up to $125,000 of fixed asset purchases during the year of purchase. Usually fixed assets are written off (depreciated) over a period of 5 to 10 years. Caps on these write-offs preclude most larger companies from taking advantage of the deduction. Small business owners may want to make bigger equipment purchases a priority in the next three years, as the section 179 rules remain favorable. In the meantime it means taxes are kept more in line with cash flow as you can buy some significant equipment and get a corresponding write-off in the year of purchase.

Married Partners: This is an interesting conundrum that many people don’t usually come across, but when married people form businesses, they usually are required to either report the income in only one partners’ name (as s sole proprietorship filing Schedule C for taxes) or they need to form a partnership, which is usually more complicated than it needs to be. However, with the new tax law provisions, couples who file jointly and share in a business venture will be able to report each share of their income as sole proprietors (simply dividing all revenue and expenses in half, or dividing it any way they want really). Basically, the result is that both “partners” can get credit for social security benefits, without maintaining the complications of a formal partnership. This is another provision that makes things a little easier for small business.

These are the most interesting changes to note. While there were a host of other tax law changes, they will be of little consequence to most of us.

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One Response to Minimum Wage Increase & Tax Changes

  1. HMG says:

    It will be interesting to see the effects of the minimum wage increase on the economy.
    I remember back from one of my first Economics classes that a low minimum wage leads to low unemployment since employers can hire more people. I wonder if the rise in the minimum wage will lead to a rise in the unemployment rate?

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