199(A) Case Study #4 – Overall taxable income limitations

[This post is part of a multi-part series on the new 199(A) deduction.  Be sure and check out our blog during the second week of each month to see the next case study. For an explanation of the basics of this deduction, please review this post.]

 Today’s case study is going to look at when the 199(A) deduction may be limited by overall taxable income.

Facts:

  • Taxpayer #1 is single and works as a 1099 locums physician. This is her only substantial income source.
  • Her Sch C Net Income is $225,000.
  • After deductions for a solo 401(k), HSA contribution, self-employed health insurance, self-employment tax, and the standard deduction, her taxable income is $141,570.
  • Taxpayers #2 are married. Spouse #1 owns a small practice with net income of $190,000, organized as a Sch C.  Spouse #2 is a teacher with W-2 wages of $35,000.
  • Due to the Spouse #2’s benefits, their only adjustment is for the self-employment tax deduction.
  • Their itemized deductions are $52,000 and include $10,000 in state and local income/real estate taxes, $12,000 in mortgage interest, and $30,000 in charity because they donated some appreciated stocks.
  • Their taxable income is $162,495.

Implications:

Since Taxpayer #1’s taxable income is less than her QBI, the 199(A) deduction is $28,314 ($141,570*20%), rather than $45,000 ($225,000*20%).  Taxpayers #2 will have a 199(A) deduction of $32,499 ($162,495*20%), rather than $38,000 ($190,000*20%).

Takeaway:

If your main source of income is QBI, but you have substantial adjustments or deductions, your 199(A) deduction will be limited to 20% of taxable income. The positive takeaway is that, without these deductions, our single physician would not have qualified for the 199(A) deduction in the first place! To find out why, read my post 199(A) The Basics

Check out our other 199(A) articles in this series:
Case Study #1 – Marital Status Impact
Case Study #2 – Dual vs. Single-income Family
Case Study #3 – Side Gig Effect

 

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