income from rental properties you own? You may be eligible to
take a juicy tax break:
20% qualified business income deduction., Subject to a litany of
rules, self-employed individuals and owners of S corporations, partnerships and
LLCs can write off 20% of their qualified business income. QBI is your
allocable share of income less deductions from a trade or business. It doesn’t
include wages, dividends, capital gain or loss, interest income, etc. Eligible
filers take the break on their 1040 return.
the QBI rules to rentals is complicated. The rental activity must
generally rise to the level of a trade or business. For this purpose, IRS regs refer to the
standard under federal tax code Section 162, the statute that generally governs
the deductibility of trade or business expenses. There is no statutory or
regulatory definition of a Section 162 trade or business. Instead, this
determination is based on a taxpayer’s specific facts and circumstances.
analysis is somewhat unclear in the context of a realty rental activity, though
the QBI regs point out some factors: Type of property (commercial or
residential), extent of day-to-day involvement by the lessor or the lessor’s
agent, lease terms, number of properties rented out and other ancillary
services provided under the lease.
Owners of rental
real estate have a safe harbor to mitigate
the uncertainty. If met, you can
treat the rental as a trade or business for QBI purposes. At least 250 hours must be devoted to the
rental activity by the taxpayer, employees or independent contractors in a
year. For realty owned four years or more, the 250-hour requirement must be
satisfied in three of the five most recent years. Time spent on repairs and maintenance, tenant
services, property management,
rents, negotiating leases and supervising workers counts. Hours put in for arranging financing,
constructing long-term capital improvements, and driving to and from the real
estate aren’t included in the 250-hour standard. The safe harbor doesn’t
apply to property leased under a triple net lease or personally used by the
owner for the greater of 14 days or 10% of the days rented. Users of the safe harbor must meet strict
must detail hours, dates and descriptions of the services, and who performed
them. If the services are done by contractors or employees, the taxpayer must
keep logs of the work done by them, as well as proof of payment. Taxpayers must also attach a statement to
their tax return for each year in which they use the safe harbor. See Rev.
Proc. 2019-38 for what to include.
rules apply to taxpayers who own multiple rental properties. They
can treat each property separately or they can aggregate similar rental
activities into commercial or residential categories. Commercial real estate
can be aggregated only with other commercial realty. Ditto for residential
rentals. Mixed-use property, such as a building with residential and commercial
tenants, may be treated as a separate rental activity or bifurcated into
commercial and residential property.
about contributing all or part of your year-end bonus to your 401(k) or
another workplace retirement plan if you haven’t yet put in the maximum. The 401(k) contribution limit for 2019 is
$19,000 ($25,000 if you’re age 50 or older).
Payins are pretax, meaning they’re not hit with federal income tax or
payroll taxes. If you want the extra
contribution to count for 2019, it must be done by year-end.
your retirement plan beneficiaries, if you haven’t done so
recently. You can help avoid unintended
consequences by updating beneficiary designations of your 401(k) or 403(b)
plans, annuities, pensions and IRAs to account for life changes such as
marriage, divorce or the death of a spouse or other listed beneficiary. While you’re at it, review the beneficiaries
listed in your will and taxable accounts. And if you don’t yet have a will,
think about drafting one sooner rather than later.
your health flexible spending account. You must clean it out by
Dec. 31 if your employer hasn’t implemented the 2½-month grace period or the
$500 carryover rule. Otherwise, you will forfeit any money left in your
HSAs is restricted. You must have a
high-deductible health plan to qualify. The minimum allowable deductible
for 2020 is $2,800 for family coverage and $1,400 for self-only coverage. And
out-of-pocket costs, including copayments, can’t exceed $6,900 a year for
individual coverage and $13,800 for family coverage. Expenses for preventive care can be covered
dollar for dollar by HDHPs, even if the deductible hasn’t been met.
Alternatively, preventive medical costs can be covered by a lower deductible,
depending on the terms of the insurance policy. This past summer, IRS relaxed
the rules for people with certain chronic illnesses. Some services and drugs
for a range of chronic conditions are treated as preventive care that can be
covered by HDHPs, including blood pressure monitors for hypertension,
statins for heart
disease, and selective serotonin reuptake inhibitors for depression.
enrolled in Medicare can’t contribute to HSAs. But don’t despair if
you have a balance in an existing HSA. Once you turn 65, you can use HSA money on
a tax-free basis to pay monthly Medicare premiums. And while you’re on
Medicare, you can continue to take tax-free payouts from your HSA for
out-of-pocket medicals. HSAs have several major federal tax advantages that
owners can enjoy. Contributions to HSAs are deductible or are from
pretax wages, up to a limit.
For 2020, the annual
cap on contributions to HSAs is $3,550 for self-only coverage and $7,100 for
family coverage. People born before 1966 can put in $1,000 more. Excess payins
aren’t deductible and are hit with a 6% yearly excise tax until withdrawn. Earnings
inside an HSA build up tax-free for the account owner. HSAs don’t have a use-it-or-lose-it rule,
unlike health flexible spending accounts. And any withdrawals that are used
to pay medical expenses are not taxed.
Distributions from HSAs
for other purposes are taxed and subject to a 20% penalty.
The fine doesn’t apply
to account owners who are age 65 or older, disabled or deceased.