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How to get income low enough for 199a deduction?

Home Tax Reduction How to get income low enough for 199a deduction?

  • Avatar JK 
    Participant
    Status: Physician
    Posts: 127
    Joined: 01/09/2016

    Fresh out of training as a new physician. My attending job is all 1099 income. I’ve been doing lots of reading on the 199a deduction here at WCI, bogleheads, Kitces, etc… It’s obviously very complicated and a lot has to be worked out still. For 2018, I will only have a few months of attending income so will definitely have income low enough to qualify. However, for 2019 I’m expecting 1099 money to be between 550-650k. This is obviously much higher than the phaseouts for a service industry and was wondering if there are any ways to get the income low enough to take advantage of this benefit in 2019. Here’s what I could think of…

    -i401k: 56k. Yep already doing that

    -Schedule C business deductions. There will be some there but not too much. Maybe a few thousand.

    -Health Insurance Premiums: maybe 10-15k

    -Backdoor Roth: no help as this does nothing to reduce income now (although I’ll still take advantage of it).

    -Standard deduction for family: 24k

    -HSA: 7k

    -Charity: we give every year but not in a financial position yet to give massive amounts to make any type of difference

    -Work Less: not interested at this point in my career. Maybe in 5-10 years. Don’t want to let the “tax tail wag the dog.”

    -Employer portion of self-employment taxes

    -solo defined benefit plan: I was told on this forum that at my age (32), it just doesn’t make sense given expenses, lower contributions, etc… So that seems off the table.

     

    So, with all that taken into consideration, it seems like I have no shot at staying under the thresholds. Is there something else that I’m missing that may help? Does an S-corp help at all in this situation as I’m not sure how the salary vs dividends play into the 199a (I know the main goal is to minimize Medicare taxes). Thanks for all the input.

     

     

    #189681 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7128
    Joined: 01/09/2016

    You’re working with an experienced CPA, right? If not, I highly recommend you do so.

    This article might also help, but, unless you or your spouse has a business with a huge loss this year, I doubt there is much you can do at your age and income level.

    Planning to Maximize Your 199A Deduction

    Remember, though, the winners in this game are not those who have the lowest tax bills but those who get to keep the most dollars in their pockets.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #189697 Reply
    Liked by Olórin
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1617
    Joined: 02/01/2016

    An S-Corp will not help reduce income, just move where it is reported. You will have roughly the same income as a sole proprietor on Form 1040 Schedule 1 Line 12 – Line 27 – Line 28 – Line 29 as you would have with an S-Corp on Form 1040 Line 1 + Schedule 1 Line 17 – Line 29.

    #189715 Reply
    Avatar docnews 
    Participant
    Status: Physician
    Posts: 372
    Joined: 01/09/2016

    Very hard for you to get a QBI. Congratulations, you are going to make tons of money. If wanting to try for qbi consider a defined benefit plan. If not going to make it, consider a s corp to save some on Medicare taxes. But both DBP and S corp cost money to setup.

    Also if you itemize instead of standard its mainly 3 items
    1) mortgage interest on up to 750k mortgage
    2) state taxes up to 10k (property + (income or sales))
    3) charity

    #189743 Reply
    Avatar Kamban 
    Participant
    Status: Physician
    Posts: 2123
    Joined: 08/01/2016

    Pardon me for being so dumb but from my reading of this section it excludes health sector and disqualifies it for the 199a deduction. So even if a physician is getting 1099 income how can he claim it if he is working as a physician providing health service. Maybe someone more intelligent than me can show me how my job as a physician with a S corp will help me to claim this tax benefit.

    Sec. 199A(d)(2) defines a specified service trade or business by reference to Sec. 1202(e)(3)(A), which includes among the businesses ineligible for the benefits of that section:

    any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.

    Sec. 199A modifies this definition in two ways: first, by removing engineering and architecture from the list of prohibited specified services businesses<sup>17</sup> before then amending the final sentence to reference the reputation or skill of one or more of its “employees or owners” rather than merely its “employees.”<sup>18</sup> Sec. 199A(d)(2)(B) then adds to the list of specified service businesses any business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.<sup>19</sup> However, see the discussion below of the taxpayer income threshold exception to the denial of the deduction for a specified service trade or business.

    #189752 Reply
    Avatar docnews 
    Participant
    Status: Physician
    Posts: 372
    Joined: 01/09/2016

    @kamban because later in the law it gives an exception if under certain income limits (315k mfj). There was big confusion about this in the mainstream media initially when the law came out.

    Tax Reform! How Physicians and the Self-Employed are Affected

    #189761 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1494
    Joined: 01/08/2016
    -Charity: we give every year but not in a financial position yet to give massive amounts to make any type of difference

    Click to expand…

    This (or work less) are your only viable options that I see.

    A donor advised fund could make a lot of sense for you, but I don’t know your student loan situation, whether or not you’re saving up for a home down payment, etc…

    Congrats on where you’re at — doing very well at 32.

    Cheers!
    -PoF

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #189772 Reply
    Avatar Kamban 
    Participant
    Status: Physician
    Posts: 2123
    Joined: 08/01/2016
    @kamban because later in the law it gives an exception if under certain income limits (315k mfj). There was big confusion about this in the mainstream media initially when the law came out.

    Click to expand…

    Thanks for the clarification. Does that include income from all sources including passive income, minus the deductions ?

    Sorry I did not keep up with it since I was turned off by the initial exclusion of the medical services and also the unusual complexity of it even for an IRS tax rule.

    #189780 Reply
    Avatar docnews 
    Participant
    Status: Physician
    Posts: 372
    Joined: 01/09/2016

    @kamban all income minus all other deductions. Turbotax calculates it for you. Seriously read the link. I tried to keep it simple with POF.

    #189781 Reply

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