End of Year Tax Planning - IRC 199A

Section 199A deduction continues to be the most complicated component of tax planning for our doctors. Due to personal service business rules that apply to dentistry, if your taxable income is above $164,900 (or $329,800 on a joint return), you are subjected to phase-outs on the deduction. After $214,900 (or $429,800 on a joint return) $429,800 of taxable income, your deduction is phased out completely.

If you are close to qualification but need some deductions to pull you back from the threshold, then consider using one or more of the strategies described below to increase your Section 199A deduction.

 Here are three possible year-end moves that could, in the right circumstances, (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time. 

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, which is the income that

• determines your eligibility for the Section 199A tax deduction,

• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and

• establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses your Form 1040 taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize). Additionally, bunching or grouping through Donor Advised Funds is a great way to accelerate these deductions to qualify while maintaining your gifting patterns.

Strategy 3: Buy Business Assets

Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2021.

This can help your Section 199A deduction in two ways:

1. The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it gets your taxable income under the threshold.

2. The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases your Section 199A deduction.