I think I may be reading this wrong. It seems for this section, a pass through business, let’s say a S corp or sole propriortership may deduct 100% of the business income if there are no capital gains or dividends as components of that income, and the total amount is under the thresholds. Am I reading that right?
So I’m trying to parse this. (a)(1)(A) and (B) seem to say that the lesser of all the business income, or 20% of whatever the total taxable income (business and non-business) that is greater than various cap gains. If we assume cap gains are zero, then it seems like 100% of a business income is deductible as pass through income as long as the business income is less than 20% of the total income. If the business income is greater than 20%, then it’s limited to 20% of the business income. Am I reading that right?
You need to keep reading. Section 199(b) seems to define “combined qualified business income amount” in such a way that you’re looking at only “20% of the taxpayer’s qualified business income” (with lots of other qualifications and limitations).
On p. 28 of the explanatory statement (following the bill itself in that pdf), begins a lengthy description of what they were trying to do. (This is the Senate version, which was adopted by the conference agreement with a change of 23% to 20%.) It begins:
It’s probably me, but I’m having a hard time following that, especially given the text has both house and senate language, then has conference agreements. I’d love to see one clean version. In any event, I can’t tell that what you quoted changes my understanding. There are some examples in the text, but they don’t fit what I’m thinking so I’m not sure if I’m interpreting them correctly.
Let’s say H and W file a joint return. H has qualified business income of $25K and W earns W2 income such that the combined income of both (without regard to this tax bill) is $100K. It seems that in this scenario H&W would be able to deduct $20K from the qualified business income.
If instead the qualified business income was $15K, and the combined income of both were still $100K, then they would only be able to deduct $15K from the qualified business income because it is now the lesser of the 20% or the whole business income.
I don’t think it’s you, this is just hard to follow. I’m guessing a bit, too, but based on the way I’m reading it, in both of your scenarios W’s earned W2 income (which I’m assuming comes from some other business not owned by W) doesn’t really come into it. In the first scenario, they would have a deduction of 20% of $25K, so $5K, and in the second scenario a deduction of $3K. (Part of the problem is that the examples given in the explanatory statement seem to assume all income coming from qualified business income or W2s from same).
My understanding is that all of the references to W2 income have to do with the case where you receive both W2 income and business income from the same qualified business that you own. They’re trying to avoid people playing games with what they take as W2 income vs what they take as profits. W2 income received as an employee of a business you don’t own doesn’t come into this at all, it’s just taxable income.
I don’t know why people keep saying that. I live in CA, and it’s going to hurt me, but most folks in CA will see a tax cut. Wikipedia only has data from 2015, but the median household income for CA in that year was $64.5K. You’re unlikely to be hit negatively by the tax changes until you’re making quite a bit more than that. And at the vey high end, you probably do even better. Again, CA has no shortage of folks at the very high end of the income scale relative to other states.
You and me both - about the guessing part. I’m going to try to parse it a bit. Here is how I’m thinking:
So this is how I’m parsing example #1 I gave. The deduction is equal to the sum of the two sections. The top section compares two things, the $25K, to 20% of $100K. The lesser of that is $20K. Add that to the bottom section and since there are no cap gains or dividends in the assumption, the bottom section is zero. That seems like the first example would yield a $20K deduction, or 80% of the business income.
I think you’re using the wrong amount for the “combined qualified business income,” which is defined in 199A(b). I want to say that 199A(b) defines that to be 20% of the qualified business income (plus some possible other stuff), so 20% of $25K in your example, but on reading that section again, I’m having trouble figuring out what’s going on with 199A(b)(2)(B). I’m also having trouble reconciling 199A(b)(1)(A)'s reference to “amounts determined under paragraph (2)” (plural) and paragraph (2)'s apparent determination of a single amount.
I’m a mathematician, not a tax accountant, and I’m about ready to throw up my hands on this. (Also, time to get back to my day job.)
This isn’t GD but I will answer your question, from my POV. Government taxes is the only Schedule A deduction I can think of that is not a discretionary cost, except casualty losses. Everything else on Schedule A are things you choose to pay, or can choose not to pay. But you cannot choose to not pay your taxes. Under the new law the government first taxes your income then forces you to pay that same income back to them in the form of taxes. What’s the difference what the amount is? Why should there be any limit on this? I would be happy to continue this as a GD discussion if there is interest.
I’m not sure I’m understanding your point, but I would say that medical and dental expenses are not discretionary. They have to be paid. Even more to the point, you can only deduct these expenses when they exceed 10 percent of your adjusted income, so that is a limitation built into the deduction.
For most people, mortgage interest is a necessity that comes with home ownership, the same as property taxes. But in the end, the only real discretionary category I see on Schedule A is charitable gifts.
As for “the government first taxes your income then forces you to pay that same income back to them in the form of taxes”, I believe you are conflating different “governments”. They are different government entities. I would say it is a choice to live in a state that has high property and income taxes. Certainly, home prices, wages, property taxes and state/local taxes are not completely independent from one another, but I don’t see why there is an ironclad rule that the federal government should allow a deduction for state and local income taxes, or not put a limit on the amount.
Now, the real answer to this is to have a flat tax with no (or very few deductions).
You have to buy food and water too but you can’t deduct those. Everybody gets to decide how much to spend on food, medical care, whether to own a home. But nobody gets to decide how much state and local tax to pay.
I know that, of course. So let’s say that one government is taxing income that another government takes away. It’s all still governments within the U.S.
You can choose to live in a state with lower or no income taxes. Of course there may be other good reasons not to do that, and an estimate by Goldman Sachs was that 1-4% of high income taxpayers in high tax states would move out because of this, might be noticeable to state treasuries if concentrated at the very top*, but not a wave.
Still I don’t see ‘discretionary’ as a solid basis to judge the validity of tax deductions.
*NJ actually issued slightly revised budget guidance recently because one person moved, David Tepper the hedge fund king moved to FL.
Returning to this, things are becoming slightly less murky to me, partly based on reporting surrounding the “Corker kickback” provision. That reporting mentions that, for taxpayers with AGI above a certain threshold, the deduction is the lesser of 20% of qualified business income and 50% of W2 wages paid by the business. That’s the section 199A(b)(2)(B) that was confusing me. Section 199A(b)(3) describes the exception from the W2 wages part for those below the threshold, and how the limit is phased in for those above.
But section 199A(b)(2)(A) makes clear that, for those below the threshold and without REIT income, the “combined qualified business income amount,” which is the amount of the deduction allowed, is 20% of qualified business income. This is simply a bizarre use of language.
So, in Bone’s example 1, the deduction is 20% of $25K, or $5K, not the $20K he calculated.
This is reasonably clearly laid out in Example 2 on p. 37 of the explanatory statement. (Just substitute 20% for 23% to adjust for the change made in conference.)
I just hope that this new deduction is going to somewhat ameliorate the significant loss in SALT deductions I’m going to have. I live on Long Island, one of the areas that’s going to be hit very hard by that loss. I’ll live with the additional taxes, but we’re also hearing predictions of significant (10-15%) drops in house prices as a result. Oh well, I had no plans to sell any time soon.
I just don’t believe that you should be taxed by one government on income that another government statutorily requires you pay in taxes. It’s an opinion and reasonable people can have other opinions. But that’s my rationale.
I also don’t think estates should be taxed because the transfer of estate assets does not create economic value, but that’s probably another thread since this thread is specifically about deductions and not the overall tax plan.
But why should one taxing authority be secondary to another? If two identical families each make $150k, why should the federal government get less from one of them to pay for the things the federal government does because one family lives in a high-tax state and the other lives in a low-tax state?
I’m not saying your opinion isn’t valid - I think it is - but it’s also influenced by personal circumstances. Others could say the same for other tax code issues. People hit by the AMT think it’s unfair. Renters think the home mortgage deduction is unfair, while the Realtor’s Association lobbies heavily to keep it (same as they did recently for the property tax ceiling we are discussing). Raising the medical expense deduction threshold from 2.5 to 10.0 percent several years ago can be viewed as unfair. In the end, we have an overly-complex tax code that creates winners and losers. As someone in a location with relatively low property and income taxes, this one doesn’t impact me, but I have empathy for those who are burdened.
OK but that’s a different rationale than ‘discretionary’ per se. And also one that’s never been entirely true up to now anyway. It was only pretty recently the tax code was changed to allow deduction of state and local sales or income taxes, prior to which sales tax was never deductible on federal income tax. And because of the ‘or’ sales tax still wasn’t deductible practically speaking except in no income tax states. Now some state and local income taxes won’t be deductible (most people don’t owe more than the new $10k limit for the deduction, which hasn’t been eliminated in the final bill). It’s not a complete change conceptually.
I think the reduction of the SALT deduction is a high point of this bill (which is a mixed bag otherwise IMO). And I think so despite the fact it will cost me personally. The federal govt should not be subsidizing the high tax rates of high tax states like mine, NJ. And the argument ‘blue states send net money to Washington’ is bogus. States as political entities impose state taxes. States as political entities do not pay federal income tax: individuals do. And the predominant reason states like NJ send net to the federal govt is that nominal incomes are high on average in NJ. But almost all (you might be an exception given your comment on the estate tax) people complaining about the new SALT deduction limit are in favor the tax code being ever more progressive. Applying the bogus notion of ‘states pay to Wash’ to complain about something hitting high income people is inconsistent for them, besides illogical. IMHO that is, not to make it a ‘Great Debate’.
State income taxes have been deductible from federal income for like, over 100 years:
Hardly recent. Yes the sales tax portion has been changed in the last 30 and 50 years, but the idea of deducting state type taxes from federal income is not new.
