If you are a freelancer or otherwise participate in the “gig economy”, you may be able to claim a new tax deduction under the Tax Cuts and Jobs Act (TCJA). The Qualified Business Income (QBI) Deduction applies to self-employment earnings (basically, any income you receive in a setting where you are not classified as an employee). Under the provision, individuals may be able to deduct up to 20% of their self-employment income on their tax returns. The deduction is up to 20% of qualified business income that is in ADDITION to the usual business expense deductions.
The QBI deduction is claimed “above the line” (e.g. before Adjusted gross income (AGI)) on your tax form which means it reduces your gross income whether you itemize deductions or don’t itemize your deductions.
The deduction is subject to a number of rules, including income restrictions for certain self-employment activities, and limits on the size of the deduction relative to your taxable income. The total taxable income limit (business income + capital gains + employment income) to receive the full 20% deduction for certain businesses is:
- $315,000/yr for married couples
- $157,500/yr for all others.
The 20% deduction percent is reduced from $315,00 to $415,000(MFJ) and from $157,500 to $207,500 (all others) over which you can’t claim the deduction. The income limitation applies to the following specified service trades or businesses:
- Actuarial science
- Performing arts
- Investing & investment management
- Dealing in securities, partnership interests, or commodities
- Any business with a principal asset of a reputation or skill of one or more of its employees or owners
The deduction does not apply to business income outside the Unite States, Income from business investments, W-2 (wages) income paid to an S-Corporation owner, or guaranteed payments to a partner.
Because this 20% deduction it reduces your AGI (i.e., it is above the AGI line) it may help you qualify for other tax deductions. This is a wonderful tax break that incentivizes self-employment and business ownership.
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