New tax code Section 199A can give you a tax deduction of up to 20 percent of your taxable income reduced by net capital gains. In new final regulations, the IRS has provided clarity on the capital gains component of the Section 199A tax deduction.
The Section 199A tax deduction applies to your trade or business income from a pass-through entity such as a proprietorship, a rental property, a trust, an estate, a partnership, or an S corporation. When taxable income is equal to or less than the threshold of $315,000 (married, filing jointly) or $157,500 (filing as single or head of household), you apply the 20 percent to the lesser of your
taxable income reduced by net capital gains, or
For the Section 199A calculation, your net capital gains are
all net capital gains taxed at a preferred tax rate, plus
dividends that are taxed at preferred capital gains rates.
Example. You have $200,000 of taxable income, $12,000 of un-recaptured Section 1250 capital gain from the sale of a rental property, and $13,000 of long-term capital gain from the sale of that rental. For Section 199A purposes, you apply the 20 percent deduction to a taxable income ceiling of $175,000 ($200,000 – $12,000 – $13,000).
In order to realize the benefits of these tax planning strategies, there are tax compliance requirements which must be designed and implemented in advance as well as maintained throughout the year.