Need an extra incentive to ease into retirement with a part-time gig? Or to earn some extra cash to supplement your Social Security and IRA payouts? Would the chance to treat 20% of your freshly found income as tax-free do the trick?
If so, say thank you to the U.S. Congress.
The new tax law creates a special 20% deduction for “pass-through entities,” a category that includes most businesses in the U.S., whether they are organized as a Subchapter S corporation, a limited liability company or a sole proprietorship—that is, simply working for yourself. Basically, you’re a pass-through if you’re not a regular corporation.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That, in fact, was the driving force behind this deduction. The new law slashes the corporate tax rate from 35% to 21%, but it only slices the top personal rate from 39.6% to 37%. Because pass-through income is hit by personal rates, the 20% deduction is an attempt to share the wealth by cutting small-business taxes, too. Shielding 20% of qualifying income from tax effectively cuts the top rate from 37% to 29.6%, which is 10 full percentage points below the old top rate.
So, how big a deal is this? It could be huge.
Cotty Lowry, a highly successful real estate agent in Minneapolis, reports that his accountant thinks he’ll be a “big winner” under the new tax bill. The 20% write-off can apply both to Lowry’s net income from his real estate business and to the rental income thrown off by several buildings he owns. At 71, Lowry, who operates as a Subchapter S corporation, has been thinking of slowing down. But he says the new tax break that lets him keep more of what he earns in commissions, plus the “pure joy of helping my clients,” may encourage him to maintain his current pace a while longer.
How the Pass-Through Deduction Works
The 199A deduction, named after the section of the tax code that authorizes it, applies to “qualified business income.” It’s probably easiest to cite what does not qualify: earnings by an employee, earnings by a regular corporation and earnings from “specified service” businesses that provide service in fields such as health, law, accounting, performing arts and athletics.
You might wonder what’s left, but don’t worry. There’s a gigantic exception. The specified-services poison pill only applies to high-income individuals. If your income is less than $157,500 on an individual return or under $315,000 on a joint return, you can deduct 20% of your qualified business income even if it comes from a specified-service business. The write-off is gradually phased out as income rises above those levels. Because this article addresses side gigs in retirement, we’ll assume you qualify.
The IRS is still figuring this all out, but it’s likely the new deduction will be figured on a special form and then entered on the Form 1040 as a subtraction from adjusted gross income.
What kind of pass-through-income work might make sense for you? Consider phasing into retirement by becoming a consultant for your former employer. Janet Bodnar retired last year from her position as editor of Kiplinger’s Personal Finance magazine. But she didn’t hang up her typewriter. She occasionally writes for the magazine, and as an independent contractor, her earnings qualify for the pass-through tax break.
You don’t have to be a major league landlord like Lowry to get a 20% break on rental income. The IRS hasn’t written regulations yet, but Steve Fishman, author of Every Landlord’s Tax Deduction Guide (Nolo, $40), says he believes that owning a single rental property will rise to the level of a business, opening the door to the new deduction. Get creative. Do you make and sell crafts at local fairs or online websites such as Etsy? Drive for Uber or Lyft? Babysit, run a dog-walking service, tutor children or give music lessons? The new tax law gives you more incentive than ever to develop a new retirement income stream. And if you already have one, you’ll get to keep more of what you earn.
-
5 Tips for Investing in the Trump PresidencyWith Trump back in office, expectations are high the bull market will continue. Here's how investors can prepare.
-
Where to Retire: Living in Portugal as a US RetireeLiving in Portugal as a retirement landing spot has abundant advantages, but do your homework and due diligence first.
-
Gov. Hochul Vows to Deliver $1 Billion in Tax Relief to New YorkersState Tax The proposed tax cuts would benefit New York middle-class families.
-
Maryland Property Tax Assessment: What It Means for YouState Tax Amid a growing deficit, Maryland property values are rising. Here’s more of what to know.
-
The American Opportunity Tax Credit (AOTC): How Much Is It Worth?Tax Credits This tax break can help you offset $2,500 in qualifying expenses tied to your higher education. Here's what you need to know.
-
Does Your State Have a Child and Dependent Care Tax Credit?Child and Dependent Care Tax Credit Over two dozen states, plus the District of Columbia offer tax credits or deductions for working families.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
New Law Delivers Tax Breaks to Natural Disaster Victims, But Is It Enough?Tax Relief The legislation provides critical tax relief to thousands of natural disaster victims across the country.
-
Five Tax-Savvy Ways To Donate This Holiday SeasonCharitable Donations Food pantries, toy drives, and animal sanctuaries are popular ways to support others year-round.
-
Can Tariffs Make Childcare More Affordable?Tariffs President-elect Trump suggested tariffs can address the childcare crisis, but economists are doubtful.
