The new 20% passthrough business income deduction is a new deduction most real estate agents qualify for
- Example: if net profit on Schedule C is $100,000, you get a new $20,000 deduction
- NAR did a great video with experts who go over it all. Really worth watching
Before Christmas, I tried to figure out how the new tax reform bill would affect my personal income tax that I would be paying. I was having a difficult time trying to make sense whether or not the 20% business income passthrough deduction would apply to me as a real estate agent. I had read the following and at first glance, it sounded like service providers like Realtors would not be able to take this deduction. Here is the section that details the businesses that don't qualify for this deduction.
"any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees"
I tabled it and figured that it wouldn't pertain to me. But then I just found out that there is an exception to the rule, based on income. For couples who are married filing joint with total income below $315,000, the 20% deduction comes into play even if you are one of those businesses that normally would not be able to take it. For single filers the income limit is $157,500. It is then phased out above that until it's eliminated.
I came across this video that the NAR put out that explains the details. I think it's worth watching so you know the overall concepts. Then you can discuss it with your tax professional in a more intelligent fashion.
I took some time to try to figure out what my taxes would be under the old system vs. the new system to see if it's going to change my life much.
Everyone's situation is different. My situation that I based my calculations on are:
Married filing joint
Four exemptions: me, the wife and two college kids
Itemized deductions of $22,000
The new system has a standard deduction of $24,000 so I'll be using that since it's more than my itemized deductions.
The new system takes away the deduction of $4,050 for each exemption so that's losing me $16,200 in deductions.
But then the tax brackets have changed along with the tax rates for each bracket. With a spreadsheet and tax tables, one can figure out tax scenarios at various income levels.
I found that the tax difference increases as my business income increases. Here's a chart I made for myself showing what the tax scenario would be at various income levels.
|Income||2017 taxes||2018 taxes||Difference|
By my calculations, the new tax laws give a bigger benefit as your income goes up. If I were to make $300,000 in 2018, I would save $21,192 in federal income taxes vs. what I would have paid in 2017. This is a great incentive. I do need a new car soon so those savings will really help.
If I only make $50,000, I'll be paying $420 more in federal income taxes. Not so good.
That's good motivation to get out there and make some money.
Remember, these comparisons are for my specific situation. Your mileage may vary by quite a bit, especially if you live in a high tax state.