2021 was the fourth year in which I’ll be eligible to receive a QBI deduction, that is, a tax deduction equal to 20% of Qualified Business Income based on IRS Section 199A.
This fairly new deduction was passed as part of the Tax Cuts and Jobs Act in 2017 as an attempt to give small business owners a break comparable to the substantial corporate tax cuts on C Corporations in the same legislation.
If essentially all of your household income comes from employment as a W-2 employee, there’s almost nothing in Section 199A for you. Hopefully, your corporate employer passed some of their tax savings on to you in the form of higher wages. I’m guessing that didn’t happen.
You might be an owner in several small businesses. If that’s the case, the deductions from each business can be added to one another to reach your total potential QBI deduction. For example, I own Physician on FIRE LLC, and as a pass-through entity, the income qualifies for a 20% deduction on qualified business income.
Don’t forget to add in REIT income! In general, it’s not very tax-efficient to own Real Estate Investment Trust (REIT) funds or individual REITs in a taxable brokerage account. However, Section 199a makes it less disadvantageous to do so. Furthermore, some real estate investments that were set up differently in the past have transitioned to a REIT structure to allow investors to benefit from the QBI deduction.
4. Your taxable income (and charitable giving) can limit your deduction.
Your final QBI deduction is the lesser of several calculations, and one of those calculations is your taxable income. As someone who donates generously, this fact has definitely impacted my deduction.