As the year draws to a close, don’t forget to maximize your Section 199A deduction. This valuable tax benefit, introduced by the Tax Cuts and Jobs Act (TCJA), provides a 20% deduction on qualified business income (QBI) for pass-through businesses. However, if your taxable income exceeds certain thresholds, careful planning is required to ensure you receive the maximum deduction. Here are three last-minute strategies to help you optimize your Section 199A deduction before December 31, 2024.

Understanding Section 199A and Its Impact

For Private Tax Solutions clients, understanding how taxable income, QBI, and other business factors affect your Section 199A deduction is crucial. If your taxable income exceeds $191,950 (or $383,900 for joint returns), your deduction may be reduced or eliminated based on your business structure, wages paid, and property.

The Section 199A deduction is limited to 20% of your taxable income (minus capital gains), and several factors can impact your eligibility. To simplify the calculation, using a Section 199A calculator can help determine your optimal deduction.

Key Considerations:

• Taxable Income: This determines eligibility for the Section 199A deduction and limits it to 20% of taxable income minus capital gains.
• QBI, Wages, and Business Type: These factors determine the size of your deduction.

If your deduction is lower than expected, consider implementing the strategies outlined below.

 

Strategy 1: Harvest Capital Losses to Lower Taxable Income

Capital gains increase your taxable income, which can reduce your Section 199A deduction. To mitigate this, consider harvesting capital losses by selling investments at a loss, which offsets your capital gains and reduces taxable income.

Example:

• Susan has $100,000 in QBI and taxable income of $220,000, including $70,000 in capital gains.
• Without any action, her Section 199A deduction is $8,780.
• By harvesting $40,000 in capital losses, her taxable income drops to $180,000, increasing her Section 199A deduction to $20,000.

This strategy results in total tax savings of $8,693:

• $6,000 from reduced capital gain taxes.
• $2,693 from the increased Section 199A deduction.

Using the Section 199A calculator helps ensure these adjustments are accurate, so you don’t miss any opportunities.

 

Strategy 2: Make Charitable Contributions to Reduce Taxable Income

Charitable donations can help lower taxable income and increase your Section 199A deduction. For clients of Private Tax Solutions, donating appreciated stock or making other contributions before December 31 can reduce your taxable income and avoid future capital gains taxes.

Example:

• Susan donates $40,000 worth of appreciated stock to charity.
• Her taxable income decreases by $40,000, and her Section 199A deduction increases.

This strategy provides tax savings of $14,537, including:

• $11,844 from the charitable contribution deduction.
• $2,693 from the increased Section 199A deduction.

Additionally, donating appreciated assets avoids future capital gains taxes, providing further financial benefits.

 

Strategy 3: Invest in Business Assets Before Year-End

Purchasing business assets before December 31, 2024, allows you to expense them under Section 179 or use bonus depreciation, reducing taxable income. This can increase your Section 199A deduction in two key ways:

1. Lower taxable income by expensing the purchase.
2. Increase QBI if the asset purchase boosts your unadjusted basis immediately after acquisition (UBIA).

Example:

• Jim runs a medical practice and has taxable income of $250,000, with QBI of $180,000.
• By purchasing $50,000 worth of medical equipment, Jim reduces his taxable income and increases his Section 199A deduction.

This strategy provides total tax savings of $23,168, including:

• $16,188 from the equipment write-off.
• $6,980 from the increased Section 199A deduction.

 

Takeaways for Private Tax Solutions Clients:

If your taxable income exceeds $191,950 (or $383,900 for joint returns), you could face a reduced or eliminated Section 199A deduction. To maximize your deduction, consider these strategies:

1. Harvest capital losses to offset gains and reduce taxable income.
2. Make charitable contributions, especially appreciated assets, to reduce taxable income and increase your Section 199A deduction.
3. Purchase business assets and expense them to reduce taxable income and increase QBI.

For personalized guidance, be sure to use the Section 199A calculator to calculate your exact deduction. If you have multiple businesses, you can evaluate each one separately to ensure you’re optimizing your tax savings.

At Private Tax Solutions, we’re dedicated to helping you navigate these strategies and ensure you make the most of your Section 199A deduction. Contact us today to learn more and start planning for your 2024 tax savings.