Retirees who receive earnings from contract or freelance work might get a huge tax break under the Tax Cuts & Jobs Act. 20% tax deduction is available to pass-through entities that retirees can qualify for.  

 A pass-through business includes sole proprietorships, partnerships, limited liability companies and S corporations. If you are retired and work as a consultant, tutor, coach or do any freelance work where you are not on a payroll, you might qualify for this huge deduction. Barron’s shares the details: 

 If you receive a Form 1099 that reports your income and file a Schedule C with your tax return, you are a sole proprietorship—whether you know it or not—and might be eligible for the 20% deduction, depending on your profession and income level. If you’re a sole proprietor generating 1099 income, but also have some part-time W-2 earnings, only the 1099 income is potentially eligible for the 20% deduction. 

 The deduction reduces your taxable income before taxes are calculated. For instance, if you earn $100,000 and qualify for the deduction, you can reduce your taxable income by 20% to $80,000. 

 No one is talking about what a wonderful retirement planning technique this deduction is for your affluent professionals, says Steve Parrish, an adjunct professor of Advanced Planning at the American College of Financial Services. Most of us don’t just retire flat out. We consult or continue to work part-time. 

People age 65 or older are at least twice as likely to be self-employed as workers in any other age group, according to the Bureau of Labor Statistics, and is the fastest-growing segment of the labor force. 

But be warned, this deduction isn’t without complexity. The provision in the law was hastily drafted with little clarity on precisely who is eligible. Since it went into effect in January 2018, the IRS has issued clarifications to help taxpayers and advisors apply the deduction properly, and more are still expected. 

The good news is the deduction is relatively straightforward for most retirees who don’t have a full-time income. 

Generally, whether you qualify for the deduction depends on your line of work and your income level. So-called specified service business owners face income thresholds. These are professionals whose businesses depend on their reputation and skill, rather than a product. The IRS lists fields such as consulting, health care, law, financial planning, architecture, accounting, education, and performing arts. 

For these workers to qualify for the full deduction, annual income may not exceed $157,500 for singles and $315,000 for couples. After those thresholds, the deduction begins to phase out and disappears at income of $207,500 for singles and $415,000 for couples. 

Most professionals who retire but then pick up a part-time workload typically are in these skills-based lines of work defined as service businesses. But after retirement, few would be earning more than the income thresholds, says Jim Toto, a CPA and partner at Mazars USA. 

If you’re a retired accountant and prepare tax returns for everyone in your condo complex and you make $100,000 a year, you would be eligible for the deduction, Toto says. 

However, if you make more than the income thresholds, it is best to check with a tax advisor whether your line of work enables you to take the deduction—there is still some confusion about whether certain occupations qualify. 

Fill out the form for a free and confidential consultation.

By clicking GET TAX HELP, I have read and accept by my electronic signature for tax resolution services offered by Justice Tax, LLC, and agree to be contacted by email, SMS/Text or other electronic format by live agent, artificial or prerecorded voice, email and/or SMS text message at my residential or cellular number, dialed manually or by auto dialer. I acknowledge and understand that consent to be contacted is not a condition to purchase products and/or services offered and I further acknowledge and agree to the Privacy Policy and Terms of Use attached hereto.

CategoryBlog

© 2019 Justice Tax, LLC

logo-footer