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Pass Thru Deduction Explained

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  • Avatar docnews 
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    Totally confused. What is the impact of this on a sole proprietor that makes ~375k before solo-401k contribution (53k) and deduction of self employment tax?

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    You would get most of the deduction since your taxable income would be at most $322k.

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    Forgot to include my spouse who makes ~60k on a W2.  Does this push us too high? Implications for married filing joint vs separately?

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    This will add to your taxable income so yes. I assume if you filed separately you would be subject to the single limit of $157.5k.

     

    Not sure of your taxable income? Look at line 43 of your 1040 last year to get a ballpark figure but then add back in the personal exemption. Every allowable deduction is allowed. Without divulging too much personal info, I make in the same ballpark as you so with deductions you can get to the number if you give to charity and fill 401k/HSA and have some business deductions.

    #86219 Reply
    Avatar docnews 
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    If you’d like to develop this further, I’d love a guest post on the topic!

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    I’d love to! But with the big preface of “do your own homework”. I like that better than ask your accountant who is also doing the same thing I am, interpreting the legaleze of this bill.

    #86220 Reply
    Avatar RosieQ 
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    So if you go way over. Let’s say 400k individual. Do you get to deduct 20% of $157,500 but no more of the pass through income, or nothing at all?

    #86222 Reply
    Avatar StarTrekDoc 
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    My bet is none –  it’ll be like other phaseouts in the amount able to claim, and once hit the top; no ability to claim any deduction on pass through income.

    #86224 Reply
    Avatar spiritrider 
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    It is similar to the Roth IRA income limit There is an eligibility threshold amount $315K/$157.5K and a phaseout of $100K/$50K for MFJ/Others. At $415K/$207.5K, there is no deduction.

    #86226 Reply
    Liked by docnews, hatton1
    Avatar ramca72 
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    I still a bit confuses but hope that our collective effort will come up with the truth!

    So it looks like we will be capped as mentioned above at 415/207.5, as the deduction phases out after 100/50 k for mfj/other. My question is, is the entire amount of 1099 income phased out and no longer qualify for the 20% deduction,  or does it only apply to income above those amounts?

     

    Check out this Trump Tax Reform Calculator. You can enter your W-2 and 1099 income and adjust various income ranges and see what your expected tax liability will be for your situation

    https://www.calcxml.com/calculators/trump-tax-reform-calculator?skn=#results

     

    You can compare this to 2017 and see if your taxes will go up or down.

    https://www.moneyhelpcenter.com/taxes/calculate/2017-federal-income-tax-calculator/#results

    #86230 Reply
    Avatar docnews 
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    This topic might be a reason NOT to do a Donor Advised Fund this December if you need a little more deduction to hit this new Pass Thru Cliff of taxable income next year.

    #86236 Reply
    Avatar docnews 
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    I still a bit confuses but hope that our collective effort will come up with the truth!

    So it looks like we will be capped as mentioned above at 415/207.5, as the deduction phases out after 100/50 k for mfj/other. My question is, is the entire amount of 1099 income phased out and no longer qualify for the 20% deduction,  or does it only apply to income above those amounts?

     

    Check out this Trump Tax Reform Calculator. You can enter your W-2 and 1099 income and adjust various income ranges and see what your expected tax liability will be for your situation

    https://www.calcxml.com/calculators/trump-tax-reform-calculator?skn=#results

     

    You can compare this to 2017 and see if your taxes will go up or down.

    https://www.moneyhelpcenter.com/taxes/calculate/2017-federal-income-tax-calculator/#results

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    I just figured out the legaleze of the phaseout.

     

    It’s based on the amount over the limit / 100k for Married or 50k for singles * the max deduction.

     

    Example: taxable income $365k, $50k over $315k, so 50k/100k = half of allowable deduction savings = $15120/2 = $7560 in saved taxes.

    At $415k for married people there would be no deduction.

    #86237 Reply
    Liked by Dr. Mom
    Avatar docnews 
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    Math nerd moment: every dollar you make over the taxable income limit you lose 15.12 cents in deduction savings. In other words for every dollar earned of taxable income from $400k to $415k you only get to “keep” 50 cents (35% + lost deduction). Weird effective marginal rate of 50%! If you include medicare taxes you keep less than half!

    #86248 Reply
    Avatar CaliBoneDoc 
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    I asked a similar question in another thread, but now that the final bill is set for vote, I’ll try again- I basically was wondering about the feasibility of reorganizing from an S-corp to a personal service corporation. Reading the actual text of the bill, it seemed like PSC’s were exluded from benefiting from the new C-corp tax rate (just like professional services were excluded from the s-corp tax deduction). However, I found a summery here (https://www.sikich.com/insight/house-senate-conference-adopts-compromise-tax-reform-bill) .. the first table seems to clearly state that PSC’s are included in the final bill. I didn’t find any mention of this in the new Kitces summary of the bill.

    So …. known limitations of PSC’s notwithstanding, are they excluded from the new corporate tax rate or not? and if not, might this be a good way for MD’s over the S-corp exclusion threshold to reorganize?

    #88066 Reply
    Liked by docnews
    Avatar TheGipper 
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    I asked a similar question in another thread, but now that the final bill is set for vote, I’ll try again- I basically was wondering about the feasibility of reorganizing from an S-corp to a personal service corporation. Reading the actual text of the bill, it seemed like PSC’s were exluded from benefiting from the new C-corp tax rate (just like professional services were excluded from the s-corp tax deduction). However, I found a summery here (https://www.sikich.com/insight/house-senate-conference-adopts-compromise-tax-reform-bill) .. the first table seems to clearly state that PSC’s are included in the final bill. I didn’t find any mention of this in the new Kitces summary of the bill.

    So …. known limitations of PSC’s notwithstanding, are they excluded from the new corporate tax rate or not? and if not, might this be a good way for MD’s over the S-corp exclusion threshold to reorganize?

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    I have not heard of any exclusions from the 21% corporate rate for PSC/PCs.

    But I still think it won’t make sense for 99% of groups.  I might be ignorant here, if one’s group wants to pay the 21% corporate tax and pay out shareholder dividends (cap gains rate 15%,20% or 23.8%), won’t the aggregate rate still be higher than the effective rate of paying out W2 salaries and zeroing profits as C Corp or pass through income as S Corp???  Maybe I’m missing the boat here, I know there are some other C Corp advantages (ie MERP, fringe benefits etc..)

     

    #88122 Reply
    Liked by docnews
    Dr. Mom Dr. Mom 
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    Not sure of your taxable income? Look at line 43 of your 1040 last year to get a ballpark figure but then add back in the personal exemption. Every allowable deduction is allowed. Without divulging too much personal info, I make in the same ballpark as you so with deductions you can get to the number if you give to charity and fill 401k/HSA and have some business deductions.

    Click to expand…

    After reading Kitces summary and your thread again, it sunk in better that the MFJ Limit of 315K is taxable income (Line 43) and not AGI (Line 37).  Sorry docnews, I was a little slow to pick that tidbit up even though you were quite clear.  Like you said, for us it means continuing regular 401K contributions instead of Roth looks even better since we can get more of the pass through deduction.  Thanks for your work on interpreting for us all.  Where in the world does your ability to interpret this stuff come from?

    #88123 Reply
    Liked by docnews
    Avatar pistolpete 
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    I was curious as well about whether as a sole proprietor it makes sense to form a C Corp. since double-taxation won’t be eliminated in this bill, my guess is no?

    #88131 Reply
    Avatar docnews 
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    Status: Physician
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    Joined: 01/09/2016

    Not sure of your taxable income? Look at line 43 of your 1040 last year to get a ballpark figure but then add back in the personal exemption. Every allowable deduction is allowed. Without divulging too much personal info, I make in the same ballpark as you so with deductions you can get to the number if you give to charity and fill 401k/HSA and have some business deductions.

    Click to expand…

    After reading Kitces summary and your thread again, it sunk in better that the MFJ Limit of 315K is taxable income (Line 43) and not AGI (Line 37).  Sorry docnews, I was a little slow to pick that tidbit up even though you were quite clear.  Like you said, for us it means continuing regular 401K contributions instead of Roth looks even better since we can get more of the pass through deduction.  Thanks for your work on interpreting for us all.  Where in the world does your ability to interpret this stuff come from?

    Click to expand…

    Thirst for knowledge that affects my family’s bottom line that no article on the internet touched on that I could find until Kitces’. Good point about Roth 401k. Thanks for the kind words!

    #88137 Reply
    Liked by Dr. Mom
    Avatar docnews 
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    I sent a guest post article to WCI and POF to get this info to a wider audience.

    #88147 Reply
    Liked by wxl31, Dr. Mom

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