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Pass Thru Deduction Explained

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  • Your end result is close, but I don’t get the math. With $474K business profit combined it matters to some degree what the distribution of the business profit is for determining the SE tax. Making the following assumption for 2019:

    If both have >= $132,900 / 92.35% = $143,909 in business profit then they will each have $132,900 * 12.4% ~= $16,480 in the Social Security component of SE tax. They will then have a combined $474,000  * 92.35% = $437,739 * 2.9% ~= $12,694 in the Medicare component of SE tax. For a total SE tax of ($16,480 * 2 = $32,960) + $12,694 = $45,924 and 1/2 SE tax of $22,962

    Note: There will be a 0.9% additional Medicare tax if one of them has a business profit > $250,000 / 92.35% ~= $270,709. This is just an additional tax and does not change SE tax, 1/2 SE tax and no amount can be deducted.

    Any amount of income and adjustments to income will change your MFJ AGI and thus taxable income. For example, the Self-employed health insurance deduction, HSA deduction, etc… Also, the taxable income used for determining the thresholds are from the 2018 Qualified Business Income Deduction—Simplified Worksheet in the 2018 draft Form 1040 Instructions. It adds capital gains and qualified dividends to your AGI – Standard or Itemized Deductions.
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    Spiritrider, thank you for your info/help on this! I don't know exactly what the split will be yet, but my expectation is that it will be more or less 50/50.

    I didn't realize that the 2.9% of medicare component of the SE tax is taken after the initial $474,000 x 92.35% calculation -- I think that is the major difference between our calculations.


    Thank you again! Will be reviewing this as we get closer to this point next year, as well.