Planning to Maximize Your Section 199A Deduction

TCJA (Tax Cuts and Jobs Act) 2017 took away employee business expenses, along with much of our ability to itemize. In particular, we can now deduct mortgage interest on only $750k of debt and are limited to a deduction of $10k/yr. for SALT deductions. On a positive note, the Pease Limitation – which reduced itemized deductions for high earners, is gone along with AMT for most high-income taxpayers.In addition, the child tax credit has become much more generous and is available to couples with MAGI up to $400k. And let’s not forget that tax brackets have dropped.

On balance, pretty good news, even for high-income taxpayers. But what I want to talk about in this post is your opportunity to qualify for the new Section 199A deduction. This 199A phases out for physicians and other specified professionals at taxable income from $315k – $415k (MFJ) and $157.5k – $207.5k (everyone else). BUT, because Congress limited the Section 199A to taxable income, rather than AGI or MAGI we have a magnificent opportunity to lower our taxes, even if we happen to work in a SSTB (“Specified Service Trade or Business”) and have high income; see response to Q5 in this IRS Q&A list.

Laura’s recent post on the Section 199A deduction, Overall Taxable Income Limitations, explains how you can adjust your income and optimize your opportunity to take the 199A deduction. Well-timed decisions can lower your taxes without increasing your expenses, as follows:

  • Setting up/contributing to a DB plan in addition to your solo-k
  • Determining how much of your 401k contributions to allocate between Roth and traditional
  • Choosing whether to pay the fee for your TPA (or other expenses of doing business) in the current year or the next
  • Changing to a HDHP to contribute to an HSA.
    • Remember that health insurance premiums are deductible for business owners, whether you file as a sole proprietor, LLC, or S-corp.
  • Timing when to reimburse yourself from your s-corp for mileage driven
    • The IRS requires expenses for accountable plans to be reimbursed within a “reasonable time period”, giving you some flexibility.
  • Whether to buy a new piece of equipment this year or next (remember that expenses charged to your credit card are deductible in the year of the charge, not in the year you pay the bill, even if you are cash basis)
  • Receipt of a signing bonus this year or next
  • Hiring your spouse (for legitimate work) and using the pay to fund a solo-k.
    • In the past, I have not recommended this strategy if the spouse’s total earned income is below the SS wage base. Qualifying for section 199A makes this strategy more appealing.
  • Setting up and funding a DAF (Donor Advised Fund)
  • Bumping up itemized deductions with non-cash charitable contributions. When you move to a new home, you may unload many outdated items at the local Goodwill organization. Please keep detailed lists to support these donations. We have seen clients deduct as much as $5k by keeping good records.

Tax planning is all about timing. For example, if you will need more deductions in order to qualify in 2019 than 2018, plan strategically to defer some of the above expenses. Look for opportunities in the year you complete training if you’ll have any self-employment during the year, whether while as a resident or if you’re going into locums. And don’t forget your spouse – any “pass-through” income has the potential for the 20% 199A deduction and non-SSTB income, including rental, has even more potential.

TCJA offers some of the best opportunities for good tax planning that I’ve seen in my lifetime. There are still a couple of weeks left this year and you should start planning early in the new year. Talk to your CPA or EA now about how to manipulate your income and expenses to take advantage of section 199A!

Laura Clifford, my partner in Fox CPAs, has written a great series of case studies on Section 199A. Start with the below and work your way through them all.

Section 199A: The Basics

Section 199A, Case Study 1 – Marital Status Impact

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