Archives for February 2019

The new Section 199A provides self-employed taxpayers with a new pass-through deduction. For many, this deduction will be simple to calculate – 20% of Qualified Business Income (QBI). However, Congress included a safeguard to prevent high-income taxpayers from abusing the new deduction. This safeguard can be referred to as the W-2 limitation.

W-2 Limitation

A taxpayer may only deduct 20% of QBI up to a certain limit. This limit is the greater of

1. 50% of the W-2 wages paid by the qualified trade or business, or
2. The sum of 25% of the W-2 wages paid by the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

For example, if a taxpayer has $200,000 of QBI, his pass-through deduction would otherwise be $40,000 (20% of QBI). Let’s assume that the taxpayer also has $20,000 of W-2 wages from the business. This taxpayer’s may only claim a $10,000 (50% of W-2 wages is the lesser amount) pass-through deduction.

By now you should be wondering how anyone could take the full 20% deduction. Naturally, attached to this provision is an exception that makes the W-2 limitation only applicable to high-income taxpayer’s. See below.

Taxable Income Exception

The new law contains an exception to the W-2 limitation rule discussed above. This exception states that if a taxpayer’s taxable income is below a certain threshold the taxpayer can ignore the W-2 limitation rule.

For 2018, the threshold amount is $157,500 (or $315,000 if married filing joint). This threshold figure will be indexed for inflation in future years. Also, please note that taxable income should be factored without including any potential pass-through deduction.

Phase-ins and Phase-Outs

The taxable income exception threshold discussed above is not absolute. The taxpayer is afforded an additional $50,000 (or $100,000 if married filing joint) to phase-out the deduction. Therefore, taxpayers may still receive a partial deduction if their taxable income is above the threshold amount, but within the phase-out range.

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Before starting your taxes, make sure you have all the necessary information to prepare your return. Here’s a sampling.

Work income.

Your income might include your salary, bonuses, commissions, and payments for freelance or part-time work. Having a list of all your income sources allows you to check off each Form W-2 or 1099 as you receive it. Even if you didn’t receive a form, you still need to report the income you received.

Rental income.

Account for all the rental payments you received from your tenants and for all the expenses you had to pay, including mortgage interest and real estate taxes. Be aware that the house payment portion that goes toward the loan principal is not deductible. Do not forget to take into account the real property depreciation.

Investment income.

Collect documents showing interest, dividends, and investment trades, such as 1099-INT, 1099-DIV, K1 schedules or composite 1099 forms from your broker. Be aware that often times brokers issue amended 1099 forms and it is advisable, before filing your return, to check with your broker that the 1099 you received is the final one.

Business interests.

Maybe you are a partner or a co-owner in a business, set up as a flow through entity and, regardless if your participation is active or passive, you must report your share of the business activity.

Expenses.

You should have all your receipts for property taxes, mortgage and home equity loan interest, childcare expenses, medical bills, tuition, charitable contributions and other potentially deductible or credit-eligible expenses. You’ll also need records of any estimated tax payments.C

Don’t deal with tax issues on your own. Contact us right now to find out how we can provide you with the answers you need. You can also go to the IRS website for more information about tax rules and regulations.