How to Make Sense of the Tax Law Changes

tax reform toolkitIn a series of posts featured on the Eye on Housing blog, NAHB economists are helping builders and remodelers make sense of the changes in tax law that resulted from legislation passed in December.

The initial two posts of this Tax Reform Toolkit discussed the basics of the pass-through deduction, or 199A, and how those rules apply to high-income taxpayers. Those articles explained how the deduction impacts those with incomes of:

  1. Less than $315,000 (married filer) or $157,500 (single) of taxable income, or
  2. More than $415,000 (married) or $207,500 (single) of taxable income.

In the first case, the pass-through deduction is generally about 20% of the taxpayer’s qualified business income (QBI). W-2 wages paid and depreciable assets limit the upper-income pass-through deduction, but the basics are relatively straightforward.

The latest post about the “phase-in” range applies to those who have taxable incomes between $315,000 and $415,000 (or half of those amounts for single filers). Taxpayers in this range can be separated into two groups:

  1. Taxpayers who would not qualify for the deduction if they had made more than $415,000/$207,500, and
  2. Everyone else

The first group includes taxpayers whose businesses do not pay any W-2 wages or have any depreciable assets as well as those in the business of a “specified service” (e.g. attorneys and accountants).

Both groups of business owners can use the formulas explained in this Eye on Housing post on the basics of the pass-through deduction, but both groups should also look at this detailed explanation of how to calculate when you’re in this phase-in range.

The next Tax Reform Toolkit post will examine changes to the business interest deduction and how it interacts with the new depreciation rules.

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