If you’ve got self-employment income, you should be thinking about your 2018 taxes now, not just your 2017 tax return due April 17. That’s because of a big opportunity that kicked in Jan. 1, thanks to the new tax law: a new 20% business income tax deduction. When a business consultant client came in to finalize his 2017 tax return, his CPA Emily Matthews turned the conversation to 2018 and how he might snag the new tax break. “It’s probably the most exciting area of tax reform, and I think it’s going to help our clients save a lot of money,” says Matthews, a partner at Edelstein & Co. in Boston.
When the tax overhaul first came out, a common misconception was that the new qualified business income deduction didn’t apply to those in the professional services industry. But it’s more nuanced than that. Section 199A allows owners of sole proprietorships, S Corporations and partnerships to take a deduction of 20% against their business income, except if you’re in a “specified service business”---unless your income is low enough. For these folks, the ability to take the deduction starts to disappear once your taxable income exceeds $315,000 for married taxpayers ($157,500 for everyone else), and you can’t take it at all once taxable income hits $415,000 if you’re married ($207,500, if not).
That makes $315,000 the magic number. “We want to get him under this number because it’s such a game changer,” Matthews says. “Assuming we plan effectively, he’ll be under the $315,000 threshold, and he saves $20,000 in taxes.” The easy way to get there is through tax-advantaged retirement savings, which he has been inclined to do anyway. He makes $700,000, and after his general business expenses has profits of $550,000. By stashing away $175,000 for himself and his wife into a cash balance retirement plan and a traditional 401(k)/profit sharing plan, making the maximum $6,850 family contribution to a health savings account for 2018, and making charitable gifts, he should get there. “We’ll be following it closely through the end of the year,” she says.