Pre-retired dentists, doctors and lawyers as well as other independent professionals may be able save tens of thousands of dollars in income taxes annually during their peak income years under the new federal tax regulations. The new rules are complex. Here are 10 things pre-retired business owners need to know about qualifying for a 20% reduction in qualified business income under Section 199(A) of the new Internal Revenue Code:
1. Sole proprietors, LLCs, S corps, partnerships and other pass-through entities qualify.
2. Real estate and rental business income — including self-rentals — may qualify.
3. Some businesses are specified as ineligible and you may need a professional to determine if you qualify.
4. Service-business owners could get a deduction on 20% of their income, subject to income limitations.
5. A business owner with $315,000 in taxable income owes tax on only $252,000 — saving more than $12,000 of income tax.
6. If you are married filing jointly and have more than $315,000 of income, the 20% deduction is subject to a phase-out. The phase-out begins at $157,500 for single filers.
7. If you have more than $415,000 of income from the service business, the 20% deduction is eliminated ($207,500 for single filers).
8. To keep your income below these thresholds, consider contributions to a defined benefit (DB) plan.
9. DB plans require you to commit to funding a defined benefit plan instead of a defined contribution plan, making them more complex.
10. A DB plan can supercharge retirement savings while minimizing your taxable income to enable you to qualify for the 20% deduction for business owners.