[Pass-Thru Entities Questions Thread]

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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MP123
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Re: [Pass-Thru Entities Questions Thread]

Post by MP123 » Thu Dec 28, 2017 4:56 pm

Specified service businesses include: "Any business where the principal asset of the business is the reputation or skill of one or more of its employees or owners".

It's not clear to me how that works with respect to engineers and architects.

Are they only excluded to the extent that their reputation and skill aren't the principal business asset? Is that even possible for a professional of any type?

Or are they excluded despite having their reputation and skill as the principal business asset?

The text (and intention) of the bill isn't very clear in this area.

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Thu Jan 11, 2018 1:53 am

Someone earlier linked to this article on Evergreen Small Business
(https://evergreensmallbusiness.com/pass ... must-know/)

I refer to their "Thing #5":
Thing #5: Taxable Income Usually Limits Actual Deduction
A first limitation that applies to every taxpayer: Tax law limits the Sec. 199A deduction to no more than 20% of the taxpayer’s taxable income subject to ordinary income tax rates.
A taxpayer with $100,000 of pass-thru income might hope for a deduction equal to 20 percent of $100,000, for example.
But if the taxpayer’s taxable income taxed at ordinary income rates equals $50,000, the actual deduction equals 20 percent of that $50,000.
Scenario:
Business Income (married partners) = $100,000
less deductions for health insurance premiums, HSA, 401k, etc = $36,000
= AGI = $64,000 (@Obamacare cliff)

less Standard Deduction = $24,000
= Taxable Income = $40,000

So now the QBI deduction is based on only 20% of $40K, or $8,000 deduction.
Result is taxable income = $32,000.

If so, it's a significant difference from the promised 20% of QBI.

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Sat Jan 13, 2018 3:54 pm

[edited]

Thanks (below). From further reading, it appears that this limitation is true, so it's not a straight 20% of business income deduction.

https://www.watsoncpagroup.com/section-199a-deduction/
Last edited by PaddyMac on Sat Jan 13, 2018 6:51 pm, edited 2 times in total.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sat Jan 13, 2018 4:22 pm

PaddyMac wrote:
Thu Jan 11, 2018 1:53 am
Someone earlier linked to this article on Evergreen Small Business
(https://evergreensmallbusiness.com/pass ... must-know/)

I refer to their "Thing #5":
Thing #5: Taxable Income Usually Limits Actual Deduction
A first limitation that applies to every taxpayer: Tax law limits the Sec. 199A deduction to no more than 20% of the taxpayer’s taxable income subject to ordinary income tax rates.
A taxpayer with $100,000 of pass-thru income might hope for a deduction equal to 20 percent of $100,000, for example.
But if the taxpayer’s taxable income taxed at ordinary income rates equals $50,000, the actual deduction equals 20 percent of that $50,000.
Scenario:
Business Income (married partners) = $100,000
less deductions for health insurance premiums, HSA, 401k, etc = $36,000
= AGI = $64,000 (@Obamacare cliff)

less Standard Deduction = $24,000
= Taxable Income = $40,000

So now the QBI deduction is based on only 20% of $40K, or $8,000 deduction.
Result is taxable income = $32,000.

If so, it's a significant difference from the promised 20% of QBI.
This is correct...the promised deduction was never 20% of QBI. The proper term is 199A deduction. If taxable income is less than QBI, the deduction is based off the lesser of the two...in certain cases there are W2 wage limitations too.

This part of the law actually makes sense - it cannot be any other way.

Basically if your taxable income is lower than QBI, you can think of every tax bracket to be lower by 20%...so the 10% MFJ bracket is 8% and 12% bracket is 9.6%...that's the effect of 199A, if taxable income is lower than QBI.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sat Jan 13, 2018 4:25 pm

PaddyMac wrote:
Sat Jan 13, 2018 3:54 pm
[bump]

Does anyone have any insight into the above? I'm beginning to think that this rule applies to S Corp owners only, but it does say "applies to every taxpayer".
The 199A only applies to pass-thru small businesses - not every tax payer. But, the lesser of the QBI or taxable income applies to all small business entity. However, with S-corp, "reasonable compensation" is NOT included in QBI, so in many cases S-corp QBI will be less than taxable income.

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Sat Jan 13, 2018 6:55 pm

Thanks for the clarifications. So it appears that income we would have from other sources – such as interest and dividends or withdrawals from our 401k (when we get to 59.5) – would also affect this balancing act of which is the "lesser" amount.

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Sat Jan 13, 2018 8:12 pm

Probably the most geeky article I've read so far on the pass-thru deduction is from Forbes' Tax Geek Tuesday blog, which is done is a nice Q&A format.

Very long read:

https://www.forbes.com/sites/anthonynit ... -deduction
Q: That is interesting. Any other weird rules/limitations I should know about?

A: Yes. Let's come full circle to where we started and remember that it's not just enough to determine the deduction subject to the rules described above. Once you've navigated the specified service business rules, the W-2 and adjusted basis limitations, and the phase-ins and phase-outs, you have to remember that there is also an overall limitation based on taxable income.

About 10,000 words, ago, we laid out the first rule of Section 199A. Under Section 199A(1)(a), once you've determined the 20% deduction, you've got to deal with an overall limitation, where the deduction is equal to the LESSER OF:

the combined "qualified business income" of the taxpayer, or
20% of the excess of taxable income minus the sum of any net capital gain
Remember, the combined qualified business income is the 20% deduction we determined above, PLUS qualified REIT dividends PLUS income from a publicly traded partnership. But we can ignore those latter two items for our purposes; I'd prefer to look at the second element of the limitation, where the deduction is limited to 20% of the excess of taxable income over net capital gain. When will this limitation matter? Consider the following example:

A has $100,000 of QBI. In addition, A has $200,000 of long-term capital gains, $20,000 of wages, and $50,000 of itemized deductions, for taxable income of $270,000. A's deduction is limited to the lesser of:

20% of QBI of $100,000, or $20,000, or
20% of ($270,000-$200,000), or $14,000.
Thus, A's deduction is limited to $14,000. Why? Because while A has taxable income of $270,000 -- including $100,000 of QBI -- $200,000 of that taxable income will be taxed at favorable long-term capital gains rates. Thus, there is only $70,000 to be taxed at ordinary rates, meaning the 20% deduction should be limited to $70,000 of income; after all, you don't want to give a 20% deduction against income that's already taxed at a top rate of 23.8%!

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sat Jan 13, 2018 8:15 pm

PaddyMac wrote:
Sat Jan 13, 2018 6:55 pm
Thanks for the clarifications. So it appears that income we would have from other sources – such as interest and dividends or withdrawals from our 401k (when we get to 59.5) – would also affect this balancing act of which is the "lesser" amount.
Precisely!...it's taxable income from ALL sources, not just the pass-thru business. That's put in their for service industry $315k (MFJ phased over $100k) threshold, to make certain all taxable earnings are accounted for...

Most of the 199A bill is quite logical except how it handles various entities of the same business...businesses that are S-corp will get a better break above threshold and sole proprietors may have an advantage below (due to S-corp 'fair compensation' not included in QBI, and above threshold 50% of W2 wages considered - where single owner sole proprietorship will have zero W2 wages)...it's quit a quagmire...hoping IRS will rectify it with its ruling.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sat Jan 13, 2018 8:16 pm

Here is the follow up to that Forbes article, which talks about the entity type quagmire

https://www.forbes.com/sites/anthonynit ... fc5ca72076

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Sun Jan 14, 2018 1:20 am

gilgamesh wrote:
Sat Jan 13, 2018 8:16 pm
Here is the follow up to that Forbes article, which talks about the entity type quagmire

https://www.forbes.com/sites/anthonynit ... fc5ca72076
Thanks, I had just found that article earlier. Very interesting read.

Tomorrow I'll listen to the Simply Tax podcast 1/9/2018 about Section 199A:
https://itunes.apple.com/us/podcast/sim ... 54995?mt=2

Also, seems like most States use AGI, not taxable income, so the pass-through deduction won't affect State Taxes.
https://taxfoundation.org/pass-deductio ... ow-states/

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Hayden
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Re: [Pass-Thru Entities Questions Thread]

Post by Hayden » Sun Jan 14, 2018 11:29 am

Seems like I may need to generate income (via Roth conversion) due to the taxable income limit.

Does anyone know of an online calculator that handles Section 199A to help with decisions on generating income?

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Sun Jan 14, 2018 12:00 pm

There are two calculators I found

https://www.calcxml.com/calculators/tru ... n=#results

I think that one does the pass-through but does not know how to do the phase-out for service businesses.

This is a more generic one
http://taxplancalculator.com

My advice is to do your own simple spreadsheet, so you can apply the "logic" of the various limitations and phase-outs (if applicable to you)

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sun Jan 14, 2018 2:46 pm

Hayden wrote:
Sun Jan 14, 2018 11:29 am
Seems like I may need to generate income (via Roth conversion) due to the taxable income limit.

Does anyone know of an online calculator that handles Section 199A to help with decisions on generating income?
Could you explain how Roth conversion increasing your taxable incomes' going to help you with the 199A deduction?

It's QBI or taxable income...do you have QBI?

If your QBI is more than taxable Income, then it's true, any taxable event like Roth conversion will indeed also get the deduction until taxable income equals QBI, so if it's the full 20% deduction, Roth conversion also gets the 20% deduction...IOW your every tax bracket is lowered by 20%, no matter whether income was originated by your business or not.

Could you tell me why Roth conversion is needed for you?
Last edited by gilgamesh on Sun Jan 14, 2018 2:47 pm, edited 1 time in total.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sun Jan 14, 2018 2:46 pm

PaddyMac wrote:
Sun Jan 14, 2018 1:20 am
gilgamesh wrote:
Sat Jan 13, 2018 8:16 pm
Here is the follow up to that Forbes article, which talks about the entity type quagmire

https://www.forbes.com/sites/anthonynit ... fc5ca72076
Thanks, I had just found that article earlier. Very interesting read.

Tomorrow I'll listen to the Simply Tax podcast 1/9/2018 about Section 199A:
https://itunes.apple.com/us/podcast/sim ... 54995?mt=2

Also, seems like most States use AGI, not taxable income, so the pass-through deduction won't affect State Taxes.
https://taxfoundation.org/pass-deductio ... ow-states/
Enjoyed the podcast very much, thank you!

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Hayden
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Re: [Pass-Thru Entities Questions Thread]

Post by Hayden » Sun Jan 14, 2018 3:02 pm

gilgamesh wrote:
Sun Jan 14, 2018 2:46 pm
Hayden wrote:
Sun Jan 14, 2018 11:29 am
Seems like I may need to generate income (via Roth conversion) due to the taxable income limit.

Does anyone know of an online calculator that handles Section 199A to help with decisions on generating income?
Could you explain how Roth conversion increasing your taxable incomes' going to help you with the 199A deduction?

It's QBI or taxable income...do you have QBI?

If your QBI is more than taxable Income, then it's true, any taxable event like Roth conversion will indeed also get the deduction until taxable income equals QBI, so if it's the full 20% deduction, Roth conversion also gets the 20% deduction...IOW your every tax bracket is lowered by 20%, no matter whether income was originated by your business or not.

Could you tell me why Roth conversion is needed for you?
Here's my thinking. Let me know if I'm wrong.

Say I have 10,000 W2 wages from my Scorp and 10,000 QBI. After I deduct HSA, health insurance, and standard deduction, my income taxed at ordinary rates is essentially 0 (I am ignoring my dividends which are almost all qualified dividends).

So it seems this would be a good time to do a Roth conversion.

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Hayden
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Re: [Pass-Thru Entities Questions Thread]

Post by Hayden » Sun Jan 14, 2018 3:08 pm

PaddyMac wrote:
Sun Jan 14, 2018 12:00 pm
There are two calculators I found

https://www.calcxml.com/calculators/tru ... n=#results

I think that one does the pass-through but does not know how to do the phase-out for service businesses.

This is a more generic one
http://taxplancalculator.com

My advice is to do your own simple spreadsheet, so you can apply the "logic" of the various limitations and phase-outs (if applicable to you)
Yes, I should make a spreadsheet. Where I get confused is when adding ordinary income shifts my qualified dividends from 0% to 15%. My income is largely dividends.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sun Jan 14, 2018 3:17 pm

Hayden wrote:
Sun Jan 14, 2018 3:02 pm
gilgamesh wrote:
Sun Jan 14, 2018 2:46 pm
Hayden wrote:
Sun Jan 14, 2018 11:29 am
Seems like I may need to generate income (via Roth conversion) due to the taxable income limit.

Does anyone know of an online calculator that handles Section 199A to help with decisions on generating income?
Could you explain how Roth conversion increasing your taxable incomes' going to help you with the 199A deduction?

It's QBI or taxable income...do you have QBI?

If your QBI is more than taxable Income, then it's true, any taxable event like Roth conversion will indeed also get the deduction until taxable income equals QBI, so if it's the full 20% deduction, Roth conversion also gets the 20% deduction...IOW your every tax bracket is lowered by 20%, no matter whether income was originated by your business or not.

Could you tell me why Roth conversion is needed for you?
Here's my thinking. Let me know if I'm wrong.

Say I have 10,000 W2 wages from my Scorp and 10,000 QBI. After I deduct HSA, health insurance, and standard deduction, my income taxed at ordinary rates is essentially 0 (I am ignoring my dividends which are almost all qualified dividends).

So it seems this would be a good time to do a Roth conversion.
I am not an accountant...here is my non-expert comments.

It sounds like you will get the 20% deduction up to about $10k...so instead of being taxed at say 10% you will be taxed at 8% for any taxable even, like Roth conversion up to $10k...if you are filing single a few dollars jump to the next higher bracket.

So, be aware...it's just a deduction, so you only get a 20% break on the taxes.

After that, you will have to figure out whether the 8% tax rate favors Roth conversion for you or not.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sun Jan 14, 2018 3:22 pm

Hayden wrote:
Sun Jan 14, 2018 3:08 pm
PaddyMac wrote:
Sun Jan 14, 2018 12:00 pm
There are two calculators I found

https://www.calcxml.com/calculators/tru ... n=#results

I think that one does the pass-through but does not know how to do the phase-out for service businesses.

This is a more generic one
http://taxplancalculator.com

My advice is to do your own simple spreadsheet, so you can apply the "logic" of the various limitations and phase-outs (if applicable to you)
Yes, I should make a spreadsheet. Where I get confused is when adding ordinary income shifts my qualified dividends from 0% to 15%. My income is largely dividends.
This doesn't seem to be consistent with your previous reply of 0 taxable income. You will only go from 0% to 15% if you jump beyond 2017 15% tax bracket...even with $10k in taxable income, you won't.

So, there is something wrong with the numbers you gave me...so, disregard my previous comments, given the new info.

P.S: The $10k may have been hypothetical, but jumping into the 15% LTCG/QD is an important consideration...some subsidies may be affected too. Doing Roth conversion, when QBI is lower than taxable only gives you 20% reduction in all your tax bracket until it equalizes QBI.

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Hayden
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Re: [Pass-Thru Entities Questions Thread]

Post by Hayden » Sun Jan 14, 2018 4:16 pm

gilgamesh wrote:
Sun Jan 14, 2018 3:22 pm
Hayden wrote:
Sun Jan 14, 2018 3:08 pm
PaddyMac wrote:
Sun Jan 14, 2018 12:00 pm
There are two calculators I found

https://www.calcxml.com/calculators/tru ... n=#results

I think that one does the pass-through but does not know how to do the phase-out for service businesses.

This is a more generic one
http://taxplancalculator.com

My advice is to do your own simple spreadsheet, so you can apply the "logic" of the various limitations and phase-outs (if applicable to you)
Yes, I should make a spreadsheet. Where I get confused is when adding ordinary income shifts my qualified dividends from 0% to 15%. My income is largely dividends.
This doesn't seem to be consistent with your previous reply of 0 taxable income. You will only go from 0% to 15% if you jump beyond 2017 15% tax bracket...even with $10k in taxable income, you won't.

So, there is something wrong with the numbers you gave me...so, disregard my previous comments, given the new info.

P.S: The $10k may have been hypothetical, but jumping into the 15% LTCG/QD is an important consideration...some subsidies may be affected too. Doing Roth conversion, when QBI is lower than taxable only gives you 20% reduction in all your tax bracket until it equalizes QBI.
My understanding is that the QBI income limitation is actually the income taxed as ordinary income. So, one could have 60,000 in qualified dividends and they would not count towards the QBI income limitation. I could be wrong.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sun Jan 14, 2018 4:41 pm

Hayden wrote:
Sun Jan 14, 2018 4:16 pm
gilgamesh wrote:
Sun Jan 14, 2018 3:22 pm
Hayden wrote:
Sun Jan 14, 2018 3:08 pm
PaddyMac wrote:
Sun Jan 14, 2018 12:00 pm
There are two calculators I found

https://www.calcxml.com/calculators/tru ... n=#results

I think that one does the pass-through but does not know how to do the phase-out for service businesses.

This is a more generic one
http://taxplancalculator.com

My advice is to do your own simple spreadsheet, so you can apply the "logic" of the various limitations and phase-outs (if applicable to you)
Yes, I should make a spreadsheet. Where I get confused is when adding ordinary income shifts my qualified dividends from 0% to 15%. My income is largely dividends.
This doesn't seem to be consistent with your previous reply of 0 taxable income. You will only go from 0% to 15% if you jump beyond 2017 15% tax bracket...even with $10k in taxable income, you won't.

So, there is something wrong with the numbers you gave me...so, disregard my previous comments, given the new info.

P.S: The $10k may have been hypothetical, but jumping into the 15% LTCG/QD is an important consideration...some subsidies may be affected too. Doing Roth conversion, when QBI is lower than taxable only gives you 20% reduction in all your tax bracket until it equalizes QBI.
My understanding is that the QBI income limitation is actually the income taxed as ordinary income. So, one could have 60,000 in qualified dividends and they would not count towards the QBI income limitation. I could be wrong.
What do you mean by QBI income limitation? There is no such thing...QBI only applies to 199A deduction, has nothing to do with qualified dividends.
There is various taxable income limitations...so what do you mean by QBI income limitation?

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Hayden
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Re: [Pass-Thru Entities Questions Thread]

Post by Hayden » Sun Jan 14, 2018 5:00 pm

gilgamesh wrote:
Sun Jan 14, 2018 4:41 pm
Hayden wrote:
Sun Jan 14, 2018 4:16 pm
gilgamesh wrote:
Sun Jan 14, 2018 3:22 pm
Hayden wrote:
Sun Jan 14, 2018 3:08 pm
PaddyMac wrote:
Sun Jan 14, 2018 12:00 pm
There are two calculators I found

https://www.calcxml.com/calculators/tru ... n=#results

I think that one does the pass-through but does not know how to do the phase-out for service businesses.

This is a more generic one
http://taxplancalculator.com

My advice is to do your own simple spreadsheet, so you can apply the "logic" of the various limitations and phase-outs (if applicable to you)
Yes, I should make a spreadsheet. Where I get confused is when adding ordinary income shifts my qualified dividends from 0% to 15%. My income is largely dividends.
This doesn't seem to be consistent with your previous reply of 0 taxable income. You will only go from 0% to 15% if you jump beyond 2017 15% tax bracket...even with $10k in taxable income, you won't.

So, there is something wrong with the numbers you gave me...so, disregard my previous comments, given the new info.

P.S: The $10k may have been hypothetical, but jumping into the 15% LTCG/QD is an important consideration...some subsidies may be affected too. Doing Roth conversion, when QBI is lower than taxable only gives you 20% reduction in all your tax bracket until it equalizes QBI.
My understanding is that the QBI income limitation is actually the income taxed as ordinary income. So, one could have 60,000 in qualified dividends and they would not count towards the QBI income limitation. I could be wrong.
What do you mean by QBI income limitation? There is no such thing...QBI only applies to 199A deduction, has nothing to do with qualified dividends.
There is various taxable income limitations...so what do you mean by QBI income limitation?
As stated above:
"Tax law limits the Sec. 199A deduction to no more than 20% of the taxpayer’s taxable income subject to ordinary income tax rates.
A taxpayer with $100,000 of pass-thru income might hope for a deduction equal to 20 percent of $100,000, for example.
But if the taxpayer’s taxable income taxed at ordinary income rates equals $50,000, the actual deduction equals 20 percent of that $50,000."

As I read this, qualified dividends (and capital gains, for that matter) do not count for the purpose of calculating this particular limitation on the amount of the Sec 199A deduction.

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sun Jan 14, 2018 5:44 pm

Hayden wrote:
Sun Jan 14, 2018 5:00 pm
gilgamesh wrote:
Sun Jan 14, 2018 4:41 pm
Hayden wrote:
Sun Jan 14, 2018 4:16 pm
gilgamesh wrote:
Sun Jan 14, 2018 3:22 pm
Hayden wrote:
Sun Jan 14, 2018 3:08 pm


Yes, I should make a spreadsheet. Where I get confused is when adding ordinary income shifts my qualified dividends from 0% to 15%. My income is largely dividends.
This doesn't seem to be consistent with your previous reply of 0 taxable income. You will only go from 0% to 15% if you jump beyond 2017 15% tax bracket...even with $10k in taxable income, you won't.

So, there is something wrong with the numbers you gave me...so, disregard my previous comments, given the new info.

P.S: The $10k may have been hypothetical, but jumping into the 15% LTCG/QD is an important consideration...some subsidies may be affected too. Doing Roth conversion, when QBI is lower than taxable only gives you 20% reduction in all your tax bracket until it equalizes QBI.
My understanding is that the QBI income limitation is actually the income taxed as ordinary income. So, one could have 60,000 in qualified dividends and they would not count towards the QBI income limitation. I could be wrong.
What do you mean by QBI income limitation? There is no such thing...QBI only applies to 199A deduction, has nothing to do with qualified dividends.
There is various taxable income limitations...so what do you mean by QBI income limitation?
As stated above:
"Tax law limits the Sec. 199A deduction to no more than 20% of the taxpayer’s taxable income subject to ordinary income tax rates.
A taxpayer with $100,000 of pass-thru income might hope for a deduction equal to 20 percent of $100,000, for example.
But if the taxpayer’s taxable income taxed at ordinary income rates equals $50,000, the actual deduction equals 20 percent of that $50,000."

As I read this, qualified dividends (and capital gains, for that matter) do not count for the purpose of calculating this particular limitation on the amount of the Sec 199A deduction.
Ok! You mentioning QBI income limitation threw me off. This is taxable income limitation.

Where did you get the quote? Is it directly from the bill?

What you've quoted sure sounds like capital gains taxes and qualified dividends do not count for the 'taxable income' limitation...but I doubt that statement is correct (just don't know)...is it all depends on the validity of what you've quoted.

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Sun Jan 14, 2018 11:27 pm

that quote is from the article I linked to near the top of this page 3

https://evergreensmallbusiness.com/pass ... must-know/

gilgamesh
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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Mon Jan 15, 2018 7:44 pm

PaddyMac wrote:
Sun Jan 14, 2018 11:27 pm
that quote is from the article I linked to near the top of this page 3

https://evergreensmallbusiness.com/pass ... must-know/
Thank you, that's a solid source.
It didn't matter to me much, so I never realized that...but it is puzzling. If it turns out to be true even after IRS directives, I'd be stunned....not only are hedge fund managers not checked, they've just been given a big high five, lol!

lstone19
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Re: [Pass-Thru Entities Questions Thread]

Post by lstone19 » Wed Jan 17, 2018 10:38 am

I'm still trying to get my head around how different limitations interact. I have a small (very small five-figure Schedule C bottom line) business and plenty of other income (wife's W-2, 1099-R, INT, etc.) so the taxable income limit will not be an issue. Business is just me - no employees. I have a solo 401k and am planning to contribute 100% (since we're over 59-1/2 and are in a state that does not tax 1099-R income, we can "back door" the income free of state income tax by contributing it to a 401k, then taking the same amount out of a tIRA (same federal tax, no state tax)). Medical comes from my wife so no medical premium deduction but we do have long-term care (LTC) policies for which we do take a Self-Employed Health Insurance Deduction (line 29).

So to throw out some sample numbers:
Schedule C bottom line: $15,000
LTC deduction: $4,000
SE Tax: $1,148

Obviously, deductions that cause income to never be taxed are more valuable than deferrals. So, do I first get the 20% 199A ($3,000) and the LTC deduction ($4,000) leaving $8,000. Can I then contribute the remaining $6,852 ($8,000 less the $1,148 SE Tax) to the solo 401k? Or does the solo 401k deduction reduce the 199A deduction (in which case making the 401k contribution makes no sense)? Or something else? Or are we not sure yet?

All I can say is I hope TurboTax is out in mid-November again so I have a month plus to play around with scenarios.

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Hayden
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Re: [Pass-Thru Entities Questions Thread]

Post by Hayden » Thu Jan 18, 2018 11:08 am

lstone19 wrote:
Wed Jan 17, 2018 10:38 am
I'm still trying to get my head around how different limitations interact. I have a small (very small five-figure Schedule C bottom line) business and plenty of other income (wife's W-2, 1099-R, INT, etc.) so the taxable income limit will not be an issue. Business is just me - no employees. I have a solo 401k and am planning to contribute 100% (since we're over 59-1/2 and are in a state that does not tax 1099-R income, we can "back door" the income free of state income tax by contributing it to a 401k, then taking the same amount out of a tIRA (same federal tax, no state tax)). Medical comes from my wife so no medical premium deduction but we do have long-term care (LTC) policies for which we do take a Self-Employed Health Insurance Deduction (line 29).

So to throw out some sample numbers:
Schedule C bottom line: $15,000
LTC deduction: $4,000
SE Tax: $1,148

Obviously, deductions that cause income to never be taxed are more valuable than deferrals. So, do I first get the 20% 199A ($3,000) and the LTC deduction ($4,000) leaving $8,000. Can I then contribute the remaining $6,852 ($8,000 less the $1,148 SE Tax) to the solo 401k? Or does the solo 401k deduction reduce the 199A deduction (in which case making the 401k contribution makes no sense)? Or something else? Or are we not sure yet?

All I can say is I hope TurboTax is out in mid-November again so I have a month plus to play around with scenarios.
I don't understand your comment about the 401k contribution not making sense. It seems to me the 401k contribution is 100% deductible, while the 199A deduction is 20%.

There are alot of different pieces to this, so I plan to use some program (TurboTax or otherwise) to fine tune this.

lstone19
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Re: [Pass-Thru Entities Questions Thread]

Post by lstone19 » Thu Jan 18, 2018 12:41 pm

Hayden wrote:
Thu Jan 18, 2018 11:08 am
lstone19 wrote:
Wed Jan 17, 2018 10:38 am
Obviously, deductions that cause income to never be taxed are more valuable than deferrals. So, do I first get the 20% 199A ($3,000) and the LTC deduction ($4,000) leaving $8,000. Can I then contribute the remaining $6,852 ($8,000 less the $1,148 SE Tax) to the solo 401k? Or does the solo 401k deduction reduce the 199A deduction (in which case making the 401k contribution makes no sense)? Or something else? Or are we not sure yet?
I don't understand your comment about the 401k contribution not making sense. It seems to me the 401k contribution is 100% deductible, while the 199A deduction is 20%.
The 401k contribution is only a deferral on taxes, not a permanent deduction (taxes will be paid on it when we take the money out which is only a few years away - we've done a good job of getting money in retirement accounts so it's not that far off that we exhaust after-tax accounts and start to draw from retirement accounts). So the 20% 199A deduction (a permanent deduction - that money will never be taxed) is more valuable than deferring taxes a few years on 100%. Hence my question wondering is the 199A deduction before or after a contribution to a solo 401k (I'm hoping it's before and that makes since I'm making an "employee" contribution, not an "employer" contribution to the 401k).

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Thu Jan 18, 2018 10:58 pm

From all I've read (and it's a lot), the Sec. 199A deduction will be taken at the top of page 2 of the 1040, after AGI is calculated. (AGI is reduced by the 401k etc.)

If you start with your AGI, and reduce it by the Standard Deduction, that will be your Taxable Income for further calculations (to see if you breach the income limit threshold, and to decide the "lesser of" rule).

Then you need to figure out the "lesser of" rule: you get to deduct 20% of your Taxable Income OR your Qualified Business Income, whichever is LESS.

Then you deduct the winner, arriving at your real Taxable Income.

So watch for the 401k contribution reducing your AGI, which then makes Taxable Income the "lesser" number. I like your reasoning that the 20% deduction is permanent - the 401k deduction is just "deferred" (although you may be taking it out and filling up lower tax brackets than when it was deferred).

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Re: [Pass-Thru Entities Questions Thread]

Post by lstone19 » Fri Jan 19, 2018 12:23 am

PaddyMac wrote:
Thu Jan 18, 2018 10:58 pm
So watch for the 401k contribution reducing your AGI, which then makes Taxable Income the "lesser" number.
Taxable income will not be a problem - my wife still works and there is 1099-R income that will dwarf the Schedule C income. Taxable Income will still be at least 10x the Schedule C income.

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Re: [Pass-Thru Entities Questions Thread]

Post by cusetownusa » Fri Jan 19, 2018 10:08 am

PaddyMac wrote:
Thu Jan 18, 2018 10:58 pm


So watch for the 401k contribution reducing your AGI, which then makes Taxable Income the "lesser" number. I like your reasoning that the 20% deduction is permanent - the 401k deduction is just "deferred" (although you may be taking it out and filling up lower tax brackets than when it was deferred).
Do you think this changes the discussion on whether maxing out a solo 401k being a no brainer? By putting say $50,000 into a solo 401k I am assuming you would be missing out on 20% of that ($10,000) as being a deduction. The $10,000 deduction would be permanent but the $50,000 contribution would still be taxed.

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PaddyMac
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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Fri Jan 19, 2018 12:11 pm

cusetownusa wrote:
Fri Jan 19, 2018 10:08 am
PaddyMac wrote:
Thu Jan 18, 2018 10:58 pm


So watch for the 401k contribution reducing your AGI, which then makes Taxable Income the "lesser" number. I like your reasoning that the 20% deduction is permanent - the 401k deduction is just "deferred" (although you may be taking it out and filling up lower tax brackets than when it was deferred).
Do you think this changes the discussion on whether maxing out a solo 401k being a no brainer? By putting say $50,000 into a solo 401k I am assuming you would be missing out on 20% of that ($10,000) as being a deduction. The $10,000 deduction would be permanent but the $50,000 contribution would still be taxed.
No! That's the weird thing about the deduction. When you save to your 401k, that's your money - not necessarily "business income". But, it does reduce your AGI and Taxable Income. So the calculations will be different for every household.

For instance, consider this for MFJ:
Spouse's W-2 income $90,000
Investment income $10,000 ***
Pass-through Qualified Business Income $100,000
Total Income = $200,000

Adjustments: half SE tax (self-employed), health care premiums for self-employed spouse, HSA, 401k etc etc = $60,000

AGI = $140,000

Less Standard Deduction $24,000

(temporary) Taxable income: $116,000

NOW the "lesser of rule" says: you get 20% of business income (100K) OR 20% of [ordinary] Taxable income (116K) whichever is LESS.
So in this case, you do get 20% of your Business Income = $20,000

(Final) Taxable Income = $96,000

*** I was assuming Interest and ordinary Dividends which are treated as ordinary income; it looks like cap gains "qualified dividends" would not be "ordinary taxable income" as they are already treated favorably in the tax code. The "lesser of" rule seems to use "ordinary" taxable income, as per the Evergreen blog quoted earlier in this thread.

That's my reading of the rules at least, and I've spend a few days reading everything I can find on it. The Forbes.com article from Tax Geek Tuesday is about the most detailed (almost too detailed).

- If you are in a service industry, and/or do not breach the income threshold, I believe this is about as complicated as the calculations need to be.

- If you get a mix of S Corp wages & distributions, or have stakes in more than one business, or have rental income or your business is capital-intensive, then you will need a CPA to figure out the formula as the "lesser of" rules are much more complex
Last edited by PaddyMac on Tue Jan 23, 2018 1:51 am, edited 3 times in total.

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Hayden
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Re: [Pass-Thru Entities Questions Thread]

Post by Hayden » Fri Jan 19, 2018 12:55 pm

PaddyMac wrote:
Fri Jan 19, 2018 12:11 pm
cusetownusa wrote:
Fri Jan 19, 2018 10:08 am
PaddyMac wrote:
Thu Jan 18, 2018 10:58 pm


So watch for the 401k contribution reducing your AGI, which then makes Taxable Income the "lesser" number. I like your reasoning that the 20% deduction is permanent - the 401k deduction is just "deferred" (although you may be taking it out and filling up lower tax brackets than when it was deferred).
Do you think this changes the discussion on whether maxing out a solo 401k being a no brainer? By putting say $50,000 into a solo 401k I am assuming you would be missing out on 20% of that ($10,000) as being a deduction. The $10,000 deduction would be permanent but the $50,000 contribution would still be taxed.
No! That's the weird thing about the deduction. When you save to your 401k, that's your money - not necessarily "business income". But, it does reduce your AGI and Taxable Income. So the calculations will be different for every household.

For instance, consider this for MFJ:
Spouse's W-2 income $90,000
Investment income $10,000
Pass-through Qualified Business Income $100,000
Total Income = $200,000

Adjustments: half SE tax (self-employed), health care premiums for self-employed spouse, HSA, 401k etc etc = $60,000

AGI = $140,000

Less Standard Deduction $24,000

(temporary) Taxable income: $116,000

NOW the "lesser of rule" says: you get 20% of business income (100K) OR 20% of Taxable income (116K) whichever is LESS.
So in this case, you do get 20% of your Business Income = $20,000

(Final) Taxable Income = $96,000

That's my reading of the rules at least, and I've spend a few days reading everything I can find on it. The Forbes.com article from Tax Geek Tuesday is about the most detailed (almost too detailed).

- If you are in a service industry, and/or do not breach the income threshold, I believe this is about as complicated as the calculations need to be.

- If you are higher income and get a mix of S Corp wages & distributions, or have stakes in more than one business, or have rental income or your business is capital-intensive, then you will need a CPA to figure out the formula as the "lesser of" rules are much more complex once you breach the income threshold (which is impossible in a service industry, hence the simpler rules).
Note, even if you have S Corp mix of wages & distributions, if your Taxable Income (not business income) is below the phase-out threshold, you just lump both together and use the simpler formula.
I think the "lessor of" rule is taxable income subject to ordinary income tax rates. This actually makes a big difference to me, because most of my income is qualified dividends. I think they don't count for the "lessor of" rule, so I will not be able to deduct 20% of QBI unless I generate some taxable income, e.g., by Roth conversion.

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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Fri Jan 19, 2018 4:06 pm

thanks, that's a good thing to keep in mind - maybe I'll edit the sample above.

on the other hand, I've seen it mentioned that investment income is taken into account when calculating whether or not you've breached the income limit threshold.

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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Fri Jan 19, 2018 4:10 pm

PaddyMac wrote:
Fri Jan 19, 2018 4:06 pm
thanks, that's a good thing to keep in mind - maybe I'll edit the sample above.

on the other hand, I've seen it mentioned that investment income is taken into account when calculating whether or not you've breached the income limit threshold.
Your above calculation is exactly how I understand and I've been reading everything like a mad man too...But what Hayden raises is critical, I'm still not sure what to think about it.

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Re: [Pass-Thru Entities Questions Thread]

Post by PaddyMac » Fri Jan 19, 2018 8:30 pm

I think the "ordinary taxable income" is critical though; and from this article it looks like Qualified Dividends are treated like Capital Gains.

God help the poor tax program coders...

https://pocketsense.com/considered-ordi ... -4392.html
Dividends -- distributions of corporate profit to shareholders -- may be taxed either as ordinary income or as capital gains, depending on the nature of the dividend. According to the Internal Revenue Service, most dividends are "ordinary dividends" and are treated as ordinary income. "Qualified dividends," on the other hand, are treated like capital gains. To count as qualified, a dividend must meet specific criteria set by the government. The IRS advises that you assume that a dividend is ordinary unless you're told otherwise by the company or mutual fund paying the dividend.

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Re: [Pass-Thru Entities Questions Thread]

Post by GreenGrowTheDollars » Fri Jan 19, 2018 9:41 pm

PaddyMac wrote:
Fri Jan 19, 2018 8:30 pm
I think the "ordinary taxable income" is critical though; and from this article it looks like Qualified Dividends are treated like Capital Gains.

God help the poor tax program coders...

https://pocketsense.com/considered-ordi ... -4392.html
Dividends -- distributions of corporate profit to shareholders -- may be taxed either as ordinary income or as capital gains, depending on the nature of the dividend. According to the Internal Revenue Service, most dividends are "ordinary dividends" and are treated as ordinary income. "Qualified dividends," on the other hand, are treated like capital gains. To count as qualified, a dividend must meet specific criteria set by the government. The IRS advises that you assume that a dividend is ordinary unless you're told otherwise by the company or mutual fund paying the dividend.
Yeah, I'm not going to be in a hurry to file that 2018 return. I expect MANY updates and clarifications as the filing season progresses. At the moment, I'm not sure what to do on the estimated tax front for 2018. I'll probably make the safe harbor contributions in April and June and hope that there is some consensus on all this before the September payment is due.

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Re: [Pass-Thru Entities Questions Thread]

Post by cusetownusa » Sat Jan 20, 2018 8:15 am

PaddyMac wrote:
Fri Jan 19, 2018 12:11 pm
cusetownusa wrote:
Fri Jan 19, 2018 10:08 am
PaddyMac wrote:
Thu Jan 18, 2018 10:58 pm


So watch for the 401k contribution reducing your AGI, which then makes Taxable Income the "lesser" number. I like your reasoning that the 20% deduction is permanent - the 401k deduction is just "deferred" (although you may be taking it out and filling up lower tax brackets than when it was deferred).
Do you think this changes the discussion on whether maxing out a solo 401k being a no brainer? By putting say $50,000 into a solo 401k I am assuming you would be missing out on 20% of that ($10,000) as being a deduction. The $10,000 deduction would be permanent but the $50,000 contribution would still be taxed.
No! That's the weird thing about the deduction. When you save to your 401k, that's your money - not necessarily "business income". But, it does reduce your AGI and Taxable Income. So the calculations will be different for every household.

For instance, consider this for MFJ:
Spouse's W-2 income $90,000
Investment income $10,000 ***
Pass-through Qualified Business Income $100,000
Total Income = $200,000

Adjustments: half SE tax (self-employed), health care premiums for self-employed spouse, HSA, 401k etc etc = $60,000

AGI = $140,000

Less Standard Deduction $24,000

(temporary) Taxable income: $116,000

NOW the "lesser of rule" says: you get 20% of business income (100K) OR 20% of [ordinary] Taxable income (116K) whichever is LESS.
So in this case, you do get 20% of your Business Income = $20,000

(Final) Taxable Income = $96,000

*** I was assuming Interest and ordinary Dividends which are treated as ordinary income; it looks like cap gains "qualified dividends" would not be "ordinary taxable income" as they are already treated favorably in the tax code. The "lesser of" rule seems to use "ordinary" taxable income, as per the Evergreen blog quoted earlier in this thread.

That's my reading of the rules at least, and I've spend a few days reading everything I can find on it. The Forbes.com article from Tax Geek Tuesday is about the most detailed (almost too detailed).

- If you are in a service industry, and/or do not breach the income threshold, I believe this is about as complicated as the calculations need to be.

- If you are higher income and get a mix of S Corp wages & distributions, or have stakes in more than one business, or have rental income or your business is capital-intensive, then you will need a CPA to figure out the formula as the "lesser of" rules are much more complex once you breach the income threshold (which is impossible in a service industry, hence the simpler rules).
Note, even if you have S Corp mix of wages & distributions, if your Taxable Income (not business income) is below the phase-out threshold, you just lump both together and use the simpler formula.
Thanks for the example.

For me my wife’s W2 income is $57,000 and we have about $80,000 in tax deferred space. That means I’m my case our taxable income would be less than my qualified pass through income of about $210,000.

In my situation does it make more sense to only contribute to tax deferred space up to the point where my taxable income equals my qualified pass thru income? Or does it still make more sense to max out all tax deferred space?

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Re: [Pass-Thru Entities Questions Thread]

Post by lstone19 » Sat Jan 20, 2018 8:39 am

cusetownusa wrote:
Sat Jan 20, 2018 8:15 am

Thanks for the example.

For me my wife’s W2 income is $57,000 and we have about $80,000 in tax deferred space. That means I’m my case our taxable income would be less than my qualified pass through income of about $210,000.

In my situation does it make more sense to only contribute to tax deferred space up to the point where my taxable income equals my qualified pass thru income? Or does it still make more sense to max out all tax deferred space?
I'd say up to the point where qualified pass through income equals taxable income. The 199A 20%, a permanent deduction, is most likely more valuable than increased tax deferrals (but if you're young and/or expect to be in a much lower tax bracket when you take the funds out, perhaps not). So it really comes down to which you think is worth more to you - never paying taxes on 20% of some sum or deferring taxes on 100% of that sum.

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Re: [Pass-Thru Entities Questions Thread]

Post by cusetownusa » Sat Jan 20, 2018 8:54 am

lstone19 wrote:
Sat Jan 20, 2018 8:39 am

I'd say up to the point where qualified pass through income equals taxable income. The 199A 20%, a permanent deduction, is most likely more valuable than increased tax deferrals (but if you're young and/or expect to be in a much lower tax bracket when you take the funds out, perhaps not). So it really comes down to which you think is worth more to you - never paying taxes on 20% of some sum or deferring taxes on 100% of that sum.
That’s what I was thinking too. My plan right now is to continue having my wife max her 403b and 457b and only contribute to my SEP Ira an amount I know won’t drop out taxable income below My pass through income. Once the year is over and I know my actual income and all other factors I will make a decision how much more to add to my SEP IRA.

Thanks for the help.

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Re: [Pass-Thru Entities Questions Thread]

Post by cusetownusa » Sat Jan 20, 2018 9:38 am

cusetownusa wrote:
Sat Jan 20, 2018 8:54 am
lstone19 wrote:
Sat Jan 20, 2018 8:39 am

I'd say up to the point where qualified pass through income equals taxable income. The 199A 20%, a permanent deduction, is most likely more valuable than increased tax deferrals (but if you're young and/or expect to be in a much lower tax bracket when you take the funds out, perhaps not). So it really comes down to which you think is worth more to you - never paying taxes on 20% of some sum or deferring taxes on 100% of that sum.
That’s what I was thinking too. My plan right now is to continue having my wife max her 403b and 457b and only contribute to my SEP Ira an amount I know won’t drop out taxable income below My pass through income. Once the year is over and I know my actual income and all other factors I will make a decision how much more to add to my SEP IRA.

Thanks for the help.
I was just thinking (scary, I know) that it may be beneficial to somehow increase our taxable income enough to allow me to max my SEP Ira and still get the full 20% deduction on my pass thru income.

Assuming I can’t convince my wife to take a second job...would it be possible to convert a portion of my SEP IRA to a Roth IRA effectively increasing my taxable income. I am assuming this isn’t possible because it sounds too good to be true to me.

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Re: [Pass-Thru Entities Questions Thread]

Post by gilgamesh » Sat Jan 20, 2018 2:23 pm

When taxable income is less than QBI, any taxable event will cost only 80 cents on the dollar until taxable income is same as QBI.

Another more useful way to look at this is take your marginal tax bracket and reduce it by 20%, that is the cost of any taxable event and not your marginal tax bracket.

Say your marginal tax rate is 24%, then a taxable event will cost yiu 24%, but thanks to the 199A deduction it will now only cost you 19.2%

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