With the GOP tax plan jelling into a final form–reaching a compromise between the Republican majority in the House and Senate–we will likely see a vote on a plan before the end of the year. When that vote happens, it’s good odds that we’ll see this plan become your reality. The plan itself has seen its share of critics, both Republicans (who have criticized the Bill for both going too far and not far enough) and Democrats (who have been displeased with both the fact that they have had nearly zero input on the plan and the impact it will have on social welfare plans as well as low to middle income households) have weighed in for and against the plan.

There’s still some ongoing debate over elements of the bill, and especially over exactly how deep to make the cuts to the corporate taxation rate. The bill may still be unable to reach a form that is agreeable to enough Republicans–the majority is narrow enough that it only takes a few dissenters to block the bill. It also is a possibility that this situation might leave Republican leaders too uncomfortable with the plan’s chances to bring a vote before the session ends. However, realistically we’re going to see this tax plan pass. The GOP is looking for a policy win after their failures to deliver on their promises regarding healthcare. With that in mind, it’s important that you understand the impact that this tax plan will have–both on you personally and in general.

The Basics of the Plan

As it is, the more general impact of the plan depends partially on who you ask. In their original pitch, Republicans said that the extremely optimistically named Tax Cuts and Jobs Act would cut Taxes for around three-quarters of U.S. citizens. However, these calculations left out some crucial elements such as how these cuts would be paid for. The procedural rules surrounding how the tax plan is being passed requires them to offset any cuts they make with revenues elsewhere in the plan–something known as keeping the bill revenue neutral. Once paying for the bill is considered, experts have indicated that the numbers essentially reverse with about three-quarters of U.S. citizens paying more overall. According to the Tax Policy Center, a non-partisan organization, those making less than around $86,000 a year will not benefit from the plan.

These calculations are based on the most recent version of the bill. Without a finalized plan, any calculations are approximations but it’s likely the final bill will be quite like this one. The primary topic the House and Senate are debating at this point is how to pay for the cuts. This debate has encompassed retirement plans, welfare programs, state and federal tax write-offs, and-most recently-reducing the cuts to the tax rate in the program. The original–and current plan–cut the corporate tax rate from 35% to 20%. There has been substantial debate over changing that number to 22% to help cover costs for the cuts–a change that has seen fierce opposition from many Republicans in the House and Senate.

Other substantial changes include changing the number of tax brackets from seven to five and changes in how employees and independent contractors are taxed. Let’s look at any potential worries you might have about the tax plan and the impact it is likely to have on you and your Business.

Your Retirement Plan

While those drafting the tax plan originally looked at 401(k) plans as a potential target for changes in making the plan revenue neutral. However, fortunately, retirement plans are currently off the chopping block. The main concerns were over the potential that 401(k) plans may have ended up taxed like Roth IRAs. 401(k) are currently made pre-tax with taxes paid as income when you start making withdrawals. Roth IRAs on the other hand are taxed when you make the original contribution.

As of now, the way retirement plans are taxed does not look like it will change substantially. The tax-free contribution limit for 401(k) will still be $18k ($18.5k next year) for those age 49 and below and $24k for those 50 and up.

Wages v. Other Forms of Income

One substantial change from the bill is that wage based income will be taxed at a substantially higher rate than independent contractors, sole proprietors (people who own a business by themselves), partnerships, and closely held corporations (basically corporations owned by a small number of people with no public stock). More than ever before, how high your taxes are will be linked to the organizational structure of your business or your occupation.

This means a couple of things. For most U.S. citizens who earn a wage as an employee, it likely means at least a small tax increase. It also means that forming a business entity has more tax advantages than ever before, a lot of people will–for good reason–make efforts to identify themselves as a business of some sort for tax purposes. This obviously has advantages for people running their own business (even a single person can form an LLC or closely held corporation in many or most situations) or larger corporations. However, it can pose a disadvantage for many. Two people doing substantially the same job will have different tax treatment based on how they are classified.

This is particularly problematic as defining what is wage income and what is business income can be a tricky proposition. Regardless, if you run a business and have not yet formed a business entity to better define income, now would be a particularly advantageous time to do so. Pass-through businesses such as partnerships are receiving a 23% deduction rate, a strong motivation for promotions for highly paid employees and restructuring. However, it is worth noting that the current bill does not allow households with a $500,00 or higher joint income and single payers with a $250,000 or higher income to qualify for the pass-through rules. These are obviously people who are better prepared to pay more in taxes. However, as written the law creates an odd situation for those making between around $530k and $624k–requiring them to pay as much as 85% of their income as taxes. While these are again people capable of paying more in taxes, this still seems unintentionally high.

Pass-throughs, which range from an ice cream stand to multibillion-dollar operations like Georgia-Pacific (a Koch Industries subsidiary) and Fidelity Investments, don’t pay corporate taxes. Instead they pass through income to their owners or shareholders, who pay taxes at the ordinary rate on their individual returns.

To summarize, the tax plan has many potential advantages unless you are classified as an employee–as most people are. If the tax plan goes through as is, expect to see shifts in how income is classified to take advantage of the new provisions.

How Will This Impact Your Mortgage and Your Estate?

One of the most substantial differences between the Senate and House approaches to the new plan revolves around your estate (what you leave behind when you pass) and your mortgage. The House plan completely repealed the estate tax, the Senate bill does not go this far. The House plan also has a lower cap on the amount you can deduct from your taxes based on what is paid on mortgage interest–$500k versus the House’s $1M cap.

Federal Deductions for State Taxes

Another change the tax plan has seen since its introduction is its approach to the deductions you can take for the taxes you pay on a state or local level. Initially, the plan would have just completely removed your ability to deduct taxes paid to your state, county or municipality.

This led to substantial argument among Republican Representatives, threatening the small margin by which the bill would pass. Ultimately, although they reached a compromise, you’re still going to see the amount you can deduct drastically limited. State and local deductions are completely gone for both sales and income tax. However, up to $10k can be deducted for local property taxes.

An Incomplete Plan

The tax plan is incomplete both in the sense that it is currently being debated and has not reached its final form and also in that it has some serious potential holes in it. The advantages of incorporation under the bill are such that putting investment profits into a corporation or making your private business a pass through are going to be a more attractive possibility than ever. This isn’t bad in and of itself, but it will lead to many classification nightmares as people scramble to avoid the higher taxes on employee wages. What’s more, with the majority of U.S. citizens earning on a wage basis, the changes are unlikely to be beneficial to these people.

As mentioned several times, the margins by which this plan is passing are slim but very few Republican Senators have held out much in the way of opposition to their party’s plan. A vote needs to happen fairly soon if the tax plan is going to be implemented in a timely fashion, so what we have now is likely very close to the final version of the plan.  There could still be some changes, and consulting a tax professional as to how this overhaul will impact you and how you should react is a very good idea.

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