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The hallmark of good tax planning is to pay taxes when your rates are the lowest. All too often, however, people simply look at their taxable income, compare it to a chart showing the tax brackets and assume that any additional income will be taxed at that rate.
That’s not always true.
Case in point, one of the most significant pieces of tax legislation passed in 2017 was the creation of IRC Section 199A, allowing small business owners to deduct up to 20% of the profits of their business. This qualified business income, or QBI, deduction presents taxpayers with a significant tax planning opportunity. By accelerating income, a portion of the tax liability that would normally be attributable to the increased income can be covered by a corresponding increase in the taxpayer’s 199A QBI deduction.
Ultimately this can lead to so-called deduction production income being taxed at just 80% of the otherwise applicable tax rate. And insofar as tax planning is first and foremost about trying to pay taxes at the lowest possible rate, that becomes much easier to do when 20% of your income is effectively tax-free thanks to a deduction that increases in tandem with your income.
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