There’s something in the new tax rules called qualified business income, which has to do with pass throughs such as your S corporations and your LLCs, and what that does is it gives you a pass through deduction of up to 20% of what your pass through income is, all right? So, that sounds like a wonderful thing, right?
Pass Through Income
Yes, it does. Before we go on, can you just quickly define what you mean by pass through income?
Anyone that operates as a S corporation, a sole proprietor, or an LLC, whether it’s a partnership or a single member LLC, that income flows through to you on a K-1 or a schedule C and is considered pass through income. So the actual entity doesn’t pay a tax, all right? The income flows through to you personally and you pay the tax personally.
And what the government is saying now, with this section 199 and qualified business income is we’re going to give you a 20% deduction for whatever that income is. You have to meet certain parameters, which is a great thing, except for guess what? You’re a professional. So with professionals there’s cap you have to look out for.
And those caps vary based on your filing status. So, a single person, you know, it’s going to phase out at around $165,000 dollars. So, you want to see what kind of planning can I do so I’m underneath that cap and I don’t lose that 20% deduction.
Oh, my Gosh, this is so confusing.
This is why I always tell people, when they ask me about, oh, do you do your taxes yourself? And I’m like, no.
Because there are too many other variables happening here.
Correct. I have a bone saw in my office, okay? So I could probably do amputations if I wanted to. It’s probably not a good idea.
Yeah, probably not.
Right, so I keep that as a reminder that we should do what we’re good at and let other professionals do what they’re good at.
YOU SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.
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