Final Regulations on Capital Gains under 199A

February 3rd, 2019 at 1:03 PM

New tax code Section 199A can give you a tax deduction of up to 20 percent of your taxable income reduced by net capital gains. 

In new final regulations, the IRS has given clarity to the capital gains component of the Section 199A tax deduction. 

You may remember that the Section 199A tax deduction applies to your trade or business income from a pass-through entity such as a proprietorship, rental property, trust, estate, partnership, or S corporation. 

When taxable income is equal to or less than the threshold of $315,000 (married, filing jointly) or $157,500 (filing as single or head of household), your Section 199A tax deduction is the lesser of your 

• taxable income reduced by net capital gains, or
• qualified business income.

For the Section 199A calculation, your net capital gains are 

• all net capital gains taxed at a preferred tax rate, plus
• dividends that are taxed at preferred capital gains rates.

Example. Sam has $200,000 of taxable income, $12,000 of unrecaptured Section 1250 capital gain from the sale of a rental property, and $13,000 of long-term capital gain from the sale of that rental. For Section 199A purposes, Sam applies the 20 percent deduction to a taxable income ceiling of $175,000 ($200,000 – $12,000 – $13,000). 

Mark S. Fineberg, CPA