Think Twice About Deferring Taxable Income Past 2020

Taking steps to defer your current individual federal income-tax bill is often a good idea, However, in today’s federal income tax environment, you could potentially have “too much” deferral. Here are the two biggest reasons why that could happen.

Future tax rates could go up

We know what the individual federal income tax rates and brackets are for this year and next year. The 2020 brackets will probably be about the same as those for 2019, with modest adjustments for inflation.

But after 2020, we don’t know if the TCJA’s individual rate cuts will be allowed to survive through 2025. Think twice about deferring income past 2020. Work with your tax adviser to formulate projections about what would happen to your future tax bills in various scenarios.

Potential negative impact of tax deferral on the pass-through business income deduction

For 2018-2025, the TCJA established a new personal deduction for up to 20% of your qualified business income from pass-through entities. However, the QBI deduction cannot exceed 20% of your personal taxable income calculated before any QBI deduction and before any net capital gain.

Other factors that can reduce your QBI and your taxable income such as claiming 100% first-year bonus depreciation and making deductible retirement plan contributions can potentially have the adverse side effect of reducing your allowable QBI deduction.

You claim the deduction, and you don’t ever have to give it back. But it’s a use-it-or-lose-it proposition because it’s only scheduled to last through 2025. If the presidency and Congress change hands, it probably won’t last that long. So, beware of over-indulging on tax deferral moves if they would significantly reduce your QBI deductions.

The bottom lines

Work with your tax pro to identify the optimal overall tax planning strategy for your specific situation, considering the TCJA changes and the possibility of higher tax rates in future years. Be careful out there.