National Tax Training Committee - PDF document

1 National Tax Training Committee – N
National Tax Training Committee – November 2019 Page 1 of 3 Qualified Business Income Deduction Scope . T ax returns having income that exceed s the threshold s are out of scope. For 2019, the thresholds are $160,700 for single or head of household, $160,725 if married filing separately , and $321,400 if married filing jointly . Calculation. The Qualified Business Income D eduction (QBI D ) for in - scope tax returns is the less e r of: 1) 20% times [ Schedule C profit minus the deductions for self - employment tax and certain out - of - scope qualified retirement plan s and self - employment health insurance (SEHI) (from Schedule 1 Lines 14 – 16) plus 20% times the qualified real estate investment trust (REIT) dividends (“199A dividends” on Form 1099 - DIV or Form K - 1 ] - OR - 2) 20% times the total of adju sted gross income (AGI) minus standard or itemized deduction minus qualified d ividends minus net capital gain . Said another way, taxable income before the QBI deduction and reduced for net capital gains (which includes qualified dividends). TaxSlayer makes the correct calculation and wi ll automatically add F orm 8995 Q ualified B usiness I ncom e D educt ion to the return if a pplicable . SEHI Deduction versus Schedule A Deduction . T he SEHI deduction will result in the lowest AGI for a taxpayer who does not itemize deductions . Counselors should compare the SEHI deduction versus a Schedule A medical deduction for a taxpayer who can itemize deductions to determine which is better for the taxpayer. If the taxpayer does itemize, compare the results for the federal and state returns with the SEHI deduction and reduced Schedule A medical expenses to the return without th e SEHI deduction and all medical expenses on Schedule A. Caution : be careful to not double count or to not include medical expenses when changing from one scenario to the other. Make t his compar

2 ison after all other sections of the fed
ison after all other sections of the federal return are comple te (but review other aspects of the return to confirm that no further analysis or change is needed) . Caution : Medicare Part B premiums in a subsequent year will be higher if MFJ modified AGI is greater than $170,000 ($85,000 for other statuses). M arketplace healt h coverage. Refer a self - employed taxpayer who purchased health insurance through the Marketplace and is eligible for Premium Tax Credit (PTC) and does not itemize to a professional preparer . There is one exception: the taxpayer has other h ealth insurance , such as long - term care or the spouse’s Medicare , that cover s the maximum SEHI deduction (the maximum SEHI deduction is equal to 92. 94 % of the Schedule C profit , i.e., the profit minus half of the SE tax from Schedule SE Line 5 ) . In this ca se, use only the non - Marketplace premiums for the SEHI deduction. Qualified Business Income Deduction National Tax Training Committee – November 2019 Page 2 of 3 Example 1 . MFJ t axpayer does not itemize deductions and has no net capital gains or REIT dividends : Medicare premiums for taxpayer and spouse $3,2 00 Schedule C profit $3,000 Taxable income before QBI deduction $ 12 ,000 Self - employment tax deduction = 7. 06 % x $3,000 = $ 212 SEHI deduction = 92. 94 % x $3,000 = $2,7 88 QBI deduction = 20% x ($3,000 - $ 2 12 - $2 ,7 88 ) = $0 Example 2 . MFJ Taxpayer does not itemize deductions and has no net capital gains or REIT dividends : Medicare premiums for taxpayer and spouse $3,2 00 Schedule C profit $ 10 ,000 Taxable income before QBI deduction $ 12 ,000 Self - employment tax deduction = 7. 06 % x $10,000 = $7 06 Eligible premiums for SEHI deduction $3,2 00 QBI deduction = 20% x ($10,000 - $7 06 - $3,2 00 ) * = $1,2 1 9 (*that is less than test 2 above: taxable income before the QBI deduction $12,00

3 0) Example 3 . MFJ t axpayer does n
0) Example 3 . MFJ t axpayer does not itemize, purchased Marketplace insurance , has no net capital gains, and is eligible for PTC : Deductible l ong term care insuran ce for spouse $ 1,6 0 0 Schedule C profit $3,000 Taxable income before QBI deduction $ 12 ,000 Maximum SEHI deduction = 92. 94 % x $3,000 = $2,7 88 Refer to professional preparer since insurance for spouse is less than the maximum SEHI deduction . Example 4 . MFJ t axpayer does not itemize, purchased Marketplace insurance , has no net capital gains, and is eligible for PTC : Deductible l ong term c are i nsurance for spouse $1,6 0 0 Sched ule C profit $1, 0 00 Taxable income before QBI deduction $ 12 ,000 Self - employment tax deduction = 7. 06 % x $1,000 = $7 1 Maximum SEHI deduction = 92. 94 % x $1, 0 00 = $ 92 9 Continue with Marketplace insurance left out of the SEHI deduction since the spouse’s insurance is more than the maximum SEHI deduction . The SEHI will reduce the QBI deduction to zero: QBI deduction = 20% x ($1, 0 00 - $7 1 - $ 92 9 ) = $0 Qualified Business Income Deduction National Tax Training Committee – November 2019 Page 3 of 3 Example 5 . Single t axpayer is itemizing deductions , including net deductible medical expenses, and has no net capital gains: Medicare premiums $ 1,600 Schedule C profit $10,000 AGI before QBI deduction $27,000 Total itemized deductions including Medicare premiums $ 15 ,000 Tax claiming Medicare premiums for SEHI deduction (QBI deduction is $1,539) $1,045 Tax claiming Medicare premiums as itemized deduction (QBI deduction is $1, 85 9) $1,021 Not claiming the SEHI deduction is better . Caution : This result may vary depending on the particular facts of the return. Enter the premiums for the SEHI (only) first and note results. Then move the medical premiums to Schedule A. Compare the results.