{"id":276,"date":"2019-02-22T23:31:40","date_gmt":"2019-02-22T23:31:40","guid":{"rendered":"http:\/\/www.danaleecpa.com\/blog\/?p=276"},"modified":"2024-03-19T15:29:18","modified_gmt":"2024-03-19T15:29:18","slug":"the-w-2-limitation-when-calculating-the-new-pass-through-deduction%ef%bb%bf","status":"publish","type":"post","link":"https:\/\/www.danaleecpa.com\/blog\/the-w-2-limitation-when-calculating-the-new-pass-through-deduction%ef%bb%bf\/","title":{"rendered":"The W-2 Limitation When Calculating the QBID"},"content":{"rendered":"\r\n

 <\/p>\r\n\r\n\r\n\r\n

The new Section 199A<\/a> provides self-employed taxpayers with a new 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.<\/p>\r\n\r\n\r\n\r\n

W-2 Limitation<\/strong><\/p>\r\n\r\n\r\n\r\n

A taxpayer may only deduct 20% of QBI up to a certain limit. This limit is the greater of<\/p>\r\n\r\n\r\n\r\n

    \r\n
  1. 50% of the W-2 wages paid by the qualified trade or business, or<\/li>\r\n
  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.<\/li>\r\n<\/ol>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    Taxable Income Exception<\/strong><\/p>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    Phase-ins and Phase-Outs <\/strong><\/p>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    Give us a call<\/a>! We are here to help.<\/p>\r\n","protected":false},"excerpt":{"rendered":"

      The new Section 199A provides self-employed taxpayers with a new 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 […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[1],"tags":[],"class_list":{"0":"post-276","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-uncategorized","7":"entry"},"_links":{"self":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts\/276","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/comments?post=276"}],"version-history":[{"count":4,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts\/276\/revisions"}],"predecessor-version":[{"id":1030,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts\/276\/revisions\/1030"}],"wp:attachment":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/media?parent=276"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/categories?post=276"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/tags?post=276"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}