Section 199A Tax-Reduction Strategies

November 17, 2021
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When it comes to your year-end tax planning, don’t forget to consider your IRC Section 199A deduction. If you don’t take advantage of this tax deduction, you may end up with an unsatisfactory $0 for your deduction amount.

If your taxable income is above $164,900 (or $329,800 on a joint return), then your type of business, wages paid and property can reduce and/or eliminate your Section 199A tax deduction. If your deduction amount is less than 20% of your qualified business income (QBI), you should consider using one of the strategies below.

Here are three year-end tax planning moves that will reduce your income taxes and boost your Section 199A deduction at the same time:

Strategy #1: Harvest Capital Losses

Capital gains will add to your taxable income, which is the income that determines your eligibility for the Section 199A tax deduction. Your taxable income also sets the upper limit (the “ceiling”) on the amount of your Section 199A deduction and establishes when you need wages and/or property to obtain your maximum deduction amounts.

If you have capital gains that are hurting your Section 199A deduction, don’t wait to adjust your tax plan before the end of the year. You have time to harvest your capital losses in order to offset the gains. This can help you reduce your taxable income and take better advantage of Section 199A tax deduction options.

Strategy #2: Make Charitable Contributions

Charitable contributions are a great way to reduce your taxable income. You can use these itemize deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction. Charitable contributions are easy to make and itemize as tax deductions (assuming you already itemize your deductions). Plus, giving back during the holiday season feels good and gives you a way to support charitable causes that are important to you, your family and your business.

Strategy #3: Buy Business Assets

Section 179 and current bonus depreciation tax laws allow you to write off 100% of the cost of most assets you buy and place into service before the end of 2021. This provides two excellent benefits for your Section 199A tax deduction:

  1. The large asset purchase and write-off can reduce your taxable income, thus putting your income under the threshold and increasing your Section 199A deduction amount.
  2. The large asset purchase and write-off can contribute to an increased Section 199A deduction. This happens only if your Section 199A deduction currently uses the calculation that includes 2.5% of unadjusted basis in your business’s qualified property. How it works is your asset purchases will increase your qualified property, which in turn increases your 199A deduction.

For all aspects of strategic year-end tax planning, including complex issues like Section 199A deductions, Section 179 deductions and bonus depreciation, you have to plan carefully and make smart moves. It helps to work with an experienced financial advisor and tax planner. At Illumination Wealth, we can help you navigate complicated tax situations, reduce your income tax liabilities (business and personal) and maximize your tax returns.

Contact Illumination Wealth today to get started.