04 Sep Will IRS Section 199A Phase In or Phase Out Your 20% Deduction?
If your pass-through business is an in-favor business and it qualifies for tax reform’s new 20 percent tax deduction on qualified business income, you benefit at all times, including being above, below, or in the expanded wage and property phase-in range.
On the other hand, if your business is a specified service trade or business (doctors, lawyers, accountants, actors, athletes, traders, etc.), it is in the out-of-favor group and you benefit only when you are in or below the phaseout range.
New tax code Section 199A creates a totally uncomplicated 20 percent tax deduction for you on your qualified business income if you operate a proprietorship, partnership, or S corporation and you
- are married and file a joint tax return with less than $315,000 in taxable income, or
- are single and file your tax return with less than $157,500 of taxable income.
Example. You operate a proprietorship, file as a single taxpayer with $135,000 of taxable income and have qualified business income of $120,000. Your new 20 percent tax deduction is $24,000 ($120,000 x 20 percent).
Once your taxable income exceeds the threshold amounts above, you arrive in one of the four possible categories below:
- Phase-in range for a non-specified service trade or business
- Phaseout range for a specified service trade or business
- Above the phase-in range for an in-favor non-specified service trade or business
- Above the phaseout range for an out-of-favor specified service trade or business
If your taxable income is going to be above the threshold amounts that trigger the phase-in or phaseout issues, you and I should spend some time on your tax planning.
Mark S. Fineberg, CPA