One of the highlights of the Tax Cuts and Jobs Act of 2017 is the new treatment of pass through income.
What is Pass Through Income Tax?
Pass-through income is business income that is “passed through” and taxed at a taxpayer’s individual income tax rate. This contrasts with the treatment of a business structured as a C corporation, whose income is taxed at a corporate tax rate.
New federal law now allows taxpayers to deduct a portion of pass-through business income on their tax returns. Joint filers with income up to $315,000 (and single filers up to $157,500) can deduct 20% of this type of taxable income starting in 2018. The deduction is more complicated for tax filers above that threshold, because it’s limited to the greater of 50% of the business’s W-2 wages or another calculation that includes the cost of acquired property — or 20% of their business income, if that’s less. The deduction phases out between $315,000 and $415,000.
WHO GETS IT?
Any sole entrepreneurship or business structured as a limited liability company (LLC), partnership or S corporation.
BY THE WAY
The tax savings this pass-through provision offers taxpayers won’t necessarily apply to state taxes, which may continue to use different formulas to determine your state tax liability.