independent contractor tax deductions?

[Iamnew2]

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Hey all, recently did taxes, and I was told by my accountant that the 20% that independent contractors are able to get:
1- don't apply to physicians?
2- have a limit, like 450k or something like that?

Have any of you been told this? I thought as independent contractors, physicians could get the 20% and that the 20% discount was specifically for doctors. Any thoughts on this? Thanks!

 

[PMR2008]

1099 Physician Financial Planning | White Coat Investor

Being in business for yourself is exciting and empowering, but does come with taking care of a few things on your own that your employer used to take care of for you. But if you work through this list, you'll be up to speed with those of us who have been self-employed for a long time.

www.whitecoatinvestor.com

Pass through does not apply to us unless less than $164,900 ($329,800 married)

 

[RangerBob]

The pass through deduction just phases out for physicians (and many other occupations). We're absolutely eligible for it.

The $329k limit takes into account business deductions, pre-tax retirement contributions, self-employed health insurance premiums. So it's either looking at your AGI or something close to it--I can't remember exactly. I'm sure the link above specifies it.

There are many ways to get your AGI down to be eligible for the deduction. Most independent contractors making under $450k I would think could take full-advantage of it. Above that you might need to start looking into some pre-tax pension plans and other creative stuff.

If I'm in the situation one year where my deductions bring my AGI under that $329k limit, then I'll often switch from making pre-tax 401k contributions to post-tax Roth 401k contributions so I can maximize the pass-through deduction. (Under $329k, your deductions and pre-tax contributions become less valuable because they decrease your pass through deduction). WhiteCoatInvestor has an article on how to optimize that deduction, going over both the pros/cons.

If you have other sources of income (real estate, W2, etc.) then things get a lot more complicated I think. Fortunately all my income is 1099 income, all from being a physician, so it's straightforward for me.

 

[RangerBob]

What You Need To Know About the Pass-Through Income Deduction | White Coat Investor

We've all been trying to avoid it, but it's time to understand this important new deduction and how you can use it to lower your tax bill starting with your 2018 taxes.

www.whitecoatinvestor.com

Section 199A Deduction (QBI) and Retirement Accounts | White Coat Investor

Section 199a may be your largest tax deduction, but it can make retirement savings complicated. Know your options if QBI applies to your business.

www.whitecoatinvestor.com

 

[Iamnew2]

The pass through deduction just phases out for physicians (and many other occupations). We're absolutely eligible for it.

The $329k limit takes into account business deductions, pre-tax retirement contributions, self-employed health insurance premiums. So it's either looking at your AGI or something close to it--I can't remember exactly. I'm sure the link above specifies it.

There are many ways to get your AGI down to be eligible for the deduction. Most independent contractors making under $450k I would think could take full-advantage of it. Above that you might need to start looking into some pre-tax pension plans and other creative stuff.

If I'm in the situation one year where my deductions bring my AGI under that $329k limit, then I'll often switch from making pre-tax 401k contributions to post-tax Roth 401k contributions so I can maximize the pass-through deduction. (Under $329k, your deductions and pre-tax contributions become less valuable because they decrease your pass through deduction). WhiteCoatInvestor has an article on how to optimize that deduction, going over both the pros/cons.

If you have other sources of income (real estate, W2, etc.) then things get a lot more complicated I think. Fortunately all my income is 1099 income, all from being a physician, so it's straightforward for me.

The pass through deduction just phases out for physicians (and many other occupations). We're absolutely eligible for it.

The $329k limit takes into account business deductions, pre-tax retirement contributions, self-employed health insurance premiums. So it's either looking at your AGI or something close to it--I can't remember exactly. I'm sure the link above specifies it.

There are many ways to get your AGI down to be eligible for the deduction. Most independent contractors making under $450k I would think could take full-advantage of it. Above that you might need to start looking into some pre-tax pension plans and other creative stuff.

If I'm in the situation one year where my deductions bring my AGI under that $329k limit, then I'll often switch from making pre-tax 401k contributions to post-tax Roth 401k contributions so I can maximize the pass-through deduction. (Under $329k, your deductions and pre-tax contributions become less valuable because they decrease your pass through deduction). WhiteCoatInvestor has an article on how to optimize that deduction, going over both the pros/cons.

If you have other sources of income (real estate, W2, etc.) then things get a lot more complicated I think. Fortunately all my income is 1099 income, all from being a physician, so it's straightforward for me.

I guess the $329k is for joint, if you make more than that it's phased out significantly it seems. We filed separately with my husband as otherwise our tax bill would have been even higher. I guess I didn't keep up with tax rules this year and thought I'd get more of the 20%, I got only very little so I was bummed. I paid more in taxes than I thought I would. I did a solo 401k and maxed it out but I guess I didn't think about doing a post tax Roth. Sigh. So much to learn.

 

[RangerBob]

I guess the $329k is for joint, if you make more than that it's phased out significantly it seems. We filed separately with my husband as otherwise our tax bill would have been even higher. I guess I didn't keep up with tax rules this year and thought I'd get more of the 20%, I got only very little so I was bummed. I paid more in taxes than I thought I would. I did a solo 401k and maxed it out but I guess I didn't think about doing a post tax Roth. Sigh. So much to learn.

The Roth only helps out if you've pushed your income below the limit, in the sense that you optimize the 20% deduction. You'll almost certainly have a higher tax bill when you file (compared to maxing out your pre-tax contributions and taking a lower pass-through deduction), but you may be overall better off in the long run when you take into account the value of the Roth 401k dollars.

I should clarify the Roth itself doesn't do anything. It's the smaller pre-tax contribution that helps you optimize the pass through deduction. But for someone who wants to max out their 401k contributions each year, then that means if you only contribute 3/4 the max in pre-tax dollars, you still have another 1/4 you can contribute elsewhere (or invest/pay off student loans, or otherwise allocate as you wish)

 

[Iamnew2]

The Roth only helps out if you've pushed your income below the limit, in the sense that you optimize the 20% deduction. You'll almost certainly have a higher tax bill when you file (compared to maxing out your pre-tax contributions and taking a lower pass-through deduction), but you may be overall better off in the long run when you take into account the value of the Roth 401k dollars.

I should clarify the Roth itself doesn't do anything. It's the smaller pre-tax contribution that helps you optimize the pass through deduction. But for someone who wants to max out their 401k contributions each year, then that means if you only contribute 3/4 the max in pre-tax dollars, you still have another 1/4 you can contribute elsewhere (or invest/pay off student loans, or otherwise allocate as you wish)

Right, but I guess if you can't lower the income to the $329 income limit for joint filers, and the $164 for single filers, the 20% gets significantly reduced. I guess previously I did not realize that the 20% had restrictions/income limits. I guess for me since I'm doing married filing separately, theres' no way I can lower my income to $164,900, and if I file jointly then the $329 limit applies which wouldn't help that much either. I guess I need to do better w financial planning.

 

[RangerBob]

I guess the $329k is for joint, if you make more than that it's phased out significantly it seems. We filed separately with my husband as otherwise our tax bill would have been even higher. I guess I didn't keep up with tax rules this year and thought I'd get more of the 20%, I got only very little so I was bummed. I paid more in taxes than I thought I would. I did a solo 401k and maxed it out but I guess I didn't think about doing a post tax Roth. Sigh. So much to learn.

I'm actually surprised you got any of the deduction if you filed separately.

I'm not sure if I'm explaining things clearly regarding pre/post-tax dollars. My explanation is really a method for "playing the game" regarding taxes, and how to take full legal advantage of the deduction. It may mean paying a bit more in taxes now if you shift some of your pre-tax contributions to post-tax, but those post-tax dollars (as the tax code currently stands) are more valuable, so it can help in the long game. Of course, most physicians will be in a lower tax bracket in retirement, which is why we should preferentially use pre-tax contributions, but the 199a deduction does muddy the waters here a little bit when you're getting phased out.

For others that read this thread I want to clarify the 199a pass-through deduction is a bit complicated, and something worth talking to your accountant in detail about. Many accountants don't seem to fully understand it either, but the WCI posts explain things quite well. I certainly wouldn't take action purely just on what I'm saying in this thread here

 

[RangerBob]

Right, but I guess if you can't lower the income to the $329 income limit for joint filers, and the $164 for single filers, the 20% gets significantly reduced. I guess previously I did not realize that the 20% had restrictions/income limits. I guess for me since I'm doing married filing separately, theres' no way I can lower my income to $164,900, and if I file jointly then the $329 limit applies which wouldn't help that much either. I guess I need to do better w financial planning.

If you're going to continue filing separately I certainly wouldn't factor the 199a deduction into account.

I don't know how being married filing jointly affects things. I don't know if the $329k limit applies to just 1099 income, or if it includes W-2 income. Your husband's occupation/employment status (W2 vs 1099) may contribute. I really don't know. My wife doesn't work, so it makes things easy for us in that regard.

 

[Iamnew2]

If you're going to continue filing separately I certainly wouldn't factor the 199a deduction into account.

I don't know how being married filing jointly affects things. I don't know if the $329k limit applies to just 1099 income, or if it includes W-2 income. Your husband's occupation/employment status (W2 vs 1099) may contribute. I really don't know. My wife doesn't work, so it makes things easy for us in that regard.

My accountant did quite a bit of research and actually sent me some tax code information directly from their own materials that they refer to, I had pretty complex taxes last year since I lived/worked in more than one state, had a cosmetic business, rental property, charitable contributions, etc. My husband's income just would have made our tax bracket even worse so decided to do separately but I guess I need to savvy up more when it comes to filling. I wish they taught us more of this in residency!