Overview
Main Menu Name: SuperDed
This calculation determines the extra §199A Deduction that may be gained by Zone 2/3 taxpayers who make contributions to a qualified retirement plan (or to charity). For example, a married taxpayer with $483,900 of income (and nothing else) from an SSTB that pays no W-2 wages and owns no capital gets no §199A Deduction. That taxpayer pays tax on all $483,900 of income (less appropriate standard or itemized deductions). If that same taxpayer, however, contributed $100K to a qualified retirement plan or to charity, this would reduce taxable by $163K (not just $100K).
In this article:
Background
Supercharged Deduction
This screen is designed to illustrate one thing: the impact on a high-income Taxpayer of making a deductible contribution to a retirement plan or to charity in order to avoid the limitations imposed by §199A.
SSTB
If a Taxpayer (married/joint) with $415,000 of income from an SSTB (and no other income), no §199A is available.
Non-SSTB
If the income comes from a non-SSTB, there might be some §199A deduction available, depending on the W-2 wages paid by the trade or business and/or UBIA capital owned by the trade or business.
Dramatic Tax Savings
In both cases, reducing income from the top of Zone #2 ($415,000) to a lower level will not only reduce federal income tax, but it will pick up a §199A deduction of as much as $63,000. Thus, in the extreme, a $100,000 contribution by a Taxpayer with SSTB income of $483,900 will reduce taxable income not to $383,900 but to $320,900. This represents a deduction of $100,000 that has been "supercharged" into a deduction of $163,000, resulting in a tax savings of an additional $15,000 (in addition to the usual tax savings of $32,000+ on the $100,000 contribution itself).
Getting Started
Entering Data
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Tax Year: Enter the year for which the federal income tax is being calculated. The program handles from year 2018 onwards. For future years, the program will default to the current year.
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Filing Status: Choose the applicable filing status - Single, Joint, Separate, Head of Household, or Estate or Trust.
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Entity Tax Type: Select from Schedule C, Partnership, or S Corporation.
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Qualified Business Income (QBI): is determined for each qualified trade or business of the taxpayer. For any taxable year, qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. The determination of qualified items of income, gain, deduction, and loss takes into account these items only to the extent included or allowed in the determination of taxable income for the year. For example, if in a taxable year, a qualified business has $100,000 of ordinary income from inventory sales, and makes an expenditure of $25,000 that is to required to be capitalized and amortized over 5 years under applicable tax rules, the qualified business income is $100,000 minus $5,000 (current-year ordinary amortization deduction), or $95,000. The qualified business income is not reduced by the entire amount of the capital expenditure, only by the amount deductible in determining taxable income for the year. If the net amount of qualified business income from all qualified trade or businesses during the year is a loss, it is carried forward as a loss from a qualified trade or business in the next taxable year.
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W-2 Wages Paid to Employee: Enter the amount of W-2 Wages paid to employees of the business. Include W-2 Wages paid to shareholder- employees of an S corporation. Do not include guaranteed payments to partners of a partnership. Sole proprietors are not paid W-2 Wages from their own sole proprietorship. W-2 Wages refers to the amounts described in paragraphs(3) and (8) of §6051(a) which are paid by a person with respect to employment of employees by the person during the calendar year ending during that taxable year. §6051(a) is "the total amount of wages as defined in §3401(a) " and §6051(a)(8) is "the total of amount of elective deferrals. §3401(a) provides that generally "wages" means all remuneration for services performed by an employee for his employer.
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Unadjusted Property Basis (UBIA): tangible property of a character subject to depreciation that is held by, and available for use in, the qualified trade or business at the close of the taxable year, and which is used in the production of qualified business income, and for which the depreciable period has not ended before the close of the taxable year. The depreciable period with respect to qualified property of a taxpayer means the period beginning on the date the property is first placed in service by the taxpayer and ending on the later of (a) the date 10 years after that date, or (b) the last day of the last full year in the applicable recovery period that would apply to the property under §168.
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Other Taxable Net Income: Enter other net income received by the taxpayer.
- Qualified Retirement Plan Contributions: For a Schedule C sole proprietor, enter in this box the qualified retirement plan contribution for the owner only. For a partner of a partnership, enter in this box the qualified retirement plan contribution only for the partner in question (each partner's plan contribution is reported on Schedule K-1 ). For an S corporation, enter in this box the qualified retirement plan contribution only for the shareholder in question (note that this is a deductible business expense on Form 1120S and would appear to reduce qualified business income).
Results
High-Income Taxpayer
The primary purpose of this screen is to display the tax impact of a high-income taxpayer making a contribution to a qualified retirement plan or to charity.
Taxpayer with $483,900 of Taxable Income from an SSTB
In the extreme case, this Taxpayer (married/joint) will get no §199A deduction. That deduction has fully phased out through Zone #2 (the "Twilight Zone"). The Taxpayer will owe $96,629 of tax.
Make a $100,000 Deductible Contribution
By making this contribution, and moving down from Zone #3 through Zone #2 to the top of Zone #1, the Taxpayer has completely removed the phase-in (Wage and Capital) and phase-out (SSTB) that are otherwise applicable.
Supercharged Deduction
The Taxpayer has converted a $100,000 contribution into a $163,000 deduction. Normally, a reduction in taxable income of $100,000 at this level would reduce the tax from $96,629 to $64,179, a savings of $32,450 (most of it at the 32% rate).
But "supercharging" the deduction from $100,000 to $163,000 lowers the taxable income from $483,900 to $252,000, and the tax from $96,629 to $49,059 (a savings of $47,570, or 47.57%). This is an extra $15,120 of tax savings. Put another way, it cost the taxpayer only $53,430 (net of taxes) to make a $100,000 contribution.
Removing §199A Limitations
By dropping modified taxable income from $483,900 to $383,900, the Taxpayer now has an unrestricted §199A deduction of $63,000 (modified taxable income of $383,900 x 20%). This further reduces actual taxable income from $383,900 to $320,000.
Standard vs. Itemized Deductions
Because of the new $10,000 limit on the deduction of state and local taxes, a Taxpayer could be in the position of opting for the $29,200 standard deduction, if other deductions do not amount to more than the $19,200 difference.
Bunching of Charitable Deductions
Assume the following:
Itemized Deductions | Standard Deduction | Deduction Claimed | |
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2018 | $10,000 | $24,000 | $24,000 |
2019 | $10,000 | $24,000 | $24,000 |
2020 | $52,000* | $24,000 | $52,000 |
Total: | $72,000 | $100,000 |
* Assume that the additional $42,000 represents the $14,000 that Taxpayer would otherwise have given to charity each year for three years.
By "bunching" the retirement/charitable contributions in Year #3, the Taxpayer has increased the aggregate deduction from $72,000 to $100,000, an increase of $28,000. This $28,000, in turn, would be supercharged into a $34,507 deduction (an increase of $6,507). With the tax savings of 41.044%, the $28,000 gift has cost the taxpayer only $16,508.
Non-SSTB Results Even More Dramatic
If we assume that all of the $483,900 of RPE income was non-SSTB, the results at this level within the phase-in zone ($383,900 => $483,900) are even more dramatic. The $28,000 additional deduction has been supercharged into a $51,240 deduction (an increase of $23,240). With the tax savings of 60.167%, the $28,000 gift has cost the taxpayer only $11,153.
SSTB vs. Non-SSTB
As it turns out, the tax results of making deductible contributions are more dramatic at the bottom of Zone #2 for SSTBs and at the top of Zone #2 for non-SSTBs.
But if a non-SSTB meets the Wage and/or Capital tests, it might still be eligible for a §199A deduction even at the $483,900 taxable income level, whereas an SSTB would have no §199A deduction at that level.
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