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This is huge for those getting 199A

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  • The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 3954
    Joined: 05/13/2011

    If your business income qualifies for the 199A deduction, there is a major wrinkle to…well…almost everything in your financial life. Your retirement planning has now been turned on its head such that you may even need a new individual 401(k) and tax-deferred contributions may no longer make sense.

    I may be all Roth all the time going forward in my WCI, LLC retirement accounts and all tax-deferred all the time in my partnership retirement accounts! It’s getting really wacky around here.

    Tax deferred retirement accounts are less valuable (a lot less valuable) than they used to be because tax deferred contributions are subtracted from qualified business income. For an S corp, it’s only the employer contributions, which makes becoming an S Corp a bit more attractive than it used to be.

    Oh man, this thing should have been called the financial planner/tax advisor employment security act.

    Critically, the introduction of the Section 199A deduction means that business owners must reevaluate their planning from the ground up, as even “obvious” decisions may need to be altered in light of the new rules. Case in point? Going forward, the Section 199A deduction will dramatically reduce the value of a tax-deductible retirement plan contributions.

    https://www.kitces.com/blog/199a-qbi-deduction-reduction-small-business-owner-retirement-plan-contributions-roth/

    This new “deduction-reduction problem” with pre-tax retirement contributions arises from the fact that the Section 199A deduction only applies to qualified business income, which is essentially the profits of a company. But when an S corporation makes an employer contribution to an employer-sponsored retirement plan, that contribution, itself, reduces corporate profits. Thus, there is less profit on which the 199A deduction can potentially apply. The sum of these moving parts is that, for some S corporation owners, a contribution to an employer-sponsored retirement plan will effectively result in a partial deduction, but still subject the entire contribution, plus all future earnings, to income tax upon distribution.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #189115 Reply
     jhwkr542 
    Participant
    Status: Physician
    Posts: 909
    Joined: 02/15/2016

    To everyone smarter than me: I’m planning on being in the phase-out range. How does this impact this? It looks like if you’re under the phase-out, Roth wins. Over, traditional wins.

    #189123 Reply
    Liked by beagler
     Orthodoc 
    Participant
    Status: Physician
    Posts: 8
    Joined: 01/27/2016

    I still don’t understand 199A despite reading the posts and talking to my accountant. Am I being too simple to think that if my income is over the phase-out limit, I shouldn’t worry too much about it. Our practice has tried to look into whether we should change anything to reap the benefits but all of our partners income is north of the phase-out limit and we can’t find a way to shift things around to try and get below the phase-out. I guess that’s a good problem to have. Would love to learn more from those of you much smarter than me.

    #189132 Reply
    Liked by Docbeans, SLC OB
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 1900
    Joined: 05/01/2017

    I still don’t understand 199A despite reading the posts and talking to my accountant. Am I being too simple to think that if my income is over the phase-out limit, I shouldn’t worry too much about it. Our practice has tried to look into whether we should change anything to reap the benefits but all of our partners income is north of the phase-out limit and we can’t find a way to shift things around to try and get below the phase-out. I guess that’s a good problem to have. Would love to learn more from those of you much smarter than me.

    Click to expand…

    this.

    i’ve spent 5+ hours reading about it and have no clarity.

    it’s absolute BS that this change appears to have such potentially sweeping changes for so many people and it’s so unclear. this is legislative malpractice.

    #189133 Reply
     jhwkr542 
    Participant
    Status: Physician
    Posts: 909
    Joined: 02/15/2016

    If you’re over the limit, doing Roth contributions won’t change the fact that you still can’t take the qbi deduction, so your tax break for traditional retirement contributions is unchanged (is you don’t have the qbi deduction reduction of retirement contribution tax benefits).

    #189135 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6697
    Joined: 01/09/2016

    This was a great article – and huge for sure. When it appeared in my inbox earlier, I thought CLICK BAIT! Not the case, and I shouldn’t have been surprised. You can buy a $200 TT license and lose a 5 figure tax deduction if you don’t know what you’re doing and how to understand what the code means.

    A business affords many opportunities and pitfalls for the unwashed. Soon after TCJA came out, I posted on this forum that it s/h/b been labeled “The CPA Jobs Act” and I am even more convinced. If you are following this thread and may qualify, please seek out experienced advice.

    Should anyone reading this diatribe assume I’m commenting to gin up business, we closed to new clients (until May) yesterday (beyond those who had already scheduled an appointment). I give WCI all the credit for affording us this incredible opportunity and not limiting our freedom of expression a la DentalTown and Bogleheads. You can find WCI’s other recommended tax strategists here.

    One of the best parts of this particular forum is the freedom to post allowed within the constraints of what is appropriate for all readers (the “living room” rule). I have always appreciated the brutal clarity Jim has articulated re: his do’s, don’t’s, and the purpose of his endeavor. We do not always agree, but I have utmost respect and unlimited gratitude for the openness with which he has operated his business and I believe we all have better financial acumen as a result.

    Thank you.

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

    #189139 Reply
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 1900
    Joined: 05/01/2017

    A business affords many opportunities and pitfalls for the unwashed. Soon after TCJA came out, I posted on this forum that it s/h/b been labeled “The CPA Jobs Act” and I am even more convinced. If you are following this thread and may qualify, please seek out experienced advice.

    Click to expand…

    Consider me absolutely disgusted. This was the “do your taxes on a postcard” crowd that passed this.

     

    #189142 Reply
     docnews 
    Participant
    Status: Physician
    Posts: 360
    Joined: 01/09/2016

    WCI is thinking about his nonservice industry blog income but for many self employed docs getting 199A they NEED the full solo401k to get their taxable income to around $315k. But yes if you are a doc making only $200k definitely do Roth to max out your QBI deduction.

    #189143 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6697
    Joined: 01/09/2016

    I still don’t understand 199A despite reading the posts and talking to my accountant. Am I being too simple to think that if my income is over the phase-out limit, I shouldn’t worry too much about it. Our practice has tried to look into whether we should change anything to reap the benefits but all of our partners income is north of the phase-out limit and we can’t find a way to shift things around to try and get below the phase-out. I guess that’s a good problem to have. Would love to learn more from those of you much smarter than me.

    Click to expand…

    If you or your spouse has a separate business, not in the list of professional businesses that are limited, then, sure, it applies. We have such a client who will be so far over this limitation, but the spouse has a very successful enterprise. Don’t forget the rules for rental property, either.

    I believe there will be many who will be surprised that they qualify. Next year will be a little easier but, this year, it’s like the Wild Wild West. We all will learn during this tax season, including CPAs who have attended all of the seminars.

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

    #189144 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6697
    Joined: 01/09/2016

    A business affords many opportunities and pitfalls for the unwashed. Soon after TCJA came out, I posted on this forum that it s/h/b been labeled “The CPA Jobs Act” and I am even more convinced. If you are following this thread and may qualify, please seek out experienced advice.

    Click to expand…

    Consider me absolutely disgusted. This was the “do your taxes on a postcard” crowd that passed this.

    Click to expand…

    Sorry you fell for that. The soundbite came from poiticians, OK? To be honest, that was not targeted toward business owners and physicians but the massive voting block.

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

    #189147 Reply
    Liked by Peds
    Drop it into MD Drop it into MD 
    Participant
    Status: Physician
    Posts: 440
    Joined: 09/20/2018

    I think that guy lost.

    #189157 Reply
     robaxin 
    Participant
    Status: Physician
    Posts: 26
    Joined: 09/10/2018

    I still don’t understand 199A despite reading the posts and talking to my accountant. Am I being too simple to think that if my income is over the phase-out limit, I shouldn’t worry too much about it. Our practice has tried to look into whether we should change anything to reap the benefits but all of our partners income is north of the phase-out limit and we can’t find a way to shift things around to try and get below the phase-out. I guess that’s a good problem to have. Would love to learn more from those of you much smarter than me.

    Click to expand…

    If you or your spouse has a separate business, not in the list of professional businesses that are limited, then, sure, it applies. We have such a client who will be so far over this limitation, but the spouse has a very successful enterprise. Don’t forget the rules for rental property, either.

    I believe there will be many who will be surprised that they qualify. Next year will be a little easier but, this year, it’s like the Wild Wild West. We all will learn during this tax season, including CPAs who have attended all of the seminars.

    Click to expand…

     

    I am still not grasping completely.

     

    Assuming MFJ total income over $415k and then one has a separate non-professional business which generates WCI blog like income, and there are wages and biz qualifies for QBI deduction, it is better to contribute to a Roth 401K as opposed to a traditional 401K?

    #189158 Reply
    Liked by docnews
     spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1435
    Joined: 02/01/2016

    If you are eligible for the QBI deduction without phaseout. The employer retirement deduction to QBI ends up effectively reducing your marginal tax rate by 20% for current vs. future comparison on those contributions.

    Assuming your current marginal tax rate is 35% and you think your marginal tax rate will be one tax bracket lower in retirement. Also assuming the TCJA brackets go away, that bracket would be 33%. Prior to the QBI deduction, different people might go either way (pre-tax or Roth.

    With the QBI deduction, your effective rate on pre-tax retirement contribution savings is 28%. Comparing that to a future 33% tax rate, makes it pretty much a slam dunk Roth contribution and/or Mega Backdoor Roth.

    Everyone’s situation is different. Their current vs. future tax rates may be different. Their projections on future tax rates (TCJA sunset, future increases, etc…) may be different. Their general view on Roth contributions, early retirement Roth conversions and desired pre-tax, taxable an Roth portfolio mix may be different.

    The one constant for everyone eligible for the QBI deduction is the it effectively reduces the tax deduction for pre-tax retirement contributions buy 20%. That changes the balance point of pre-tax/Roth contributions towards Roth contributions.

    #189183 Reply
    Liked by docnews, Peds
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2510
    Joined: 01/14/2017

    So I’ve already put an employer contribution into my solo 401k, which doesn’t have a Roth option. Seems like it’s too late to change anything for 2018, regardless of these new issuances, no?

    #189185 Reply
    Liked by docnews
     docnews 
    Participant
    Status: Physician
    Posts: 360
    Joined: 01/09/2016

    @robaxin yes (see more nuanced answer by @spiritrider )

    @ENTdoc yes. That is why these last minute clarifications seem unfair. I needed the solo401k deduction to even get any QBI deduction but if I earn less this year I might not for 2019. So basically my employer contribution decision will be made closer to the end of the year.

    #189210 Reply

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