Thank you for the concise explanation. My comments are in body in REDNo, it's the Qualified Business Income Deduction, not credit. It reduces your taxable income by 20% of your Qualified Business Income (a deduction), it doesn't reduce your tax by 20% of your QBI (a credit).
I missworded my original post, thank you for pointing out the error. I will edit it to correctly state my understanding and I think we are on the same page.
So if your QBI is $23k you'll get a $4600 deduction. If you're at least $4600 into the 22% bracket this will save you $1012 in tax. If you had $1000 more expenses making your QBI $22k you'd have a $4400 deduction saving $968, or $44 less, but you'd also save $220 from the lower income resulting in a net savings of $176. Another way to think about it is that any deduction that reduces your income but also reduces your QBI is worth 80% of your marginal tax bracket or 17.6% in the 22% bracket.
Business expenses also reduce your self employment tax (good) and your self employment tax deduction (bad), but along with that 17.6% savings would put you around a 30% savings, unless you're maxing out social security tax at your W2 job. Of course, lower self employment tax also likely means lower eventual social security benefit.
I think these two paragraphs indicate that there are more pennies to be harvested by maximizing your expenses at the detriment of the QBI deduction, especially when you consider SE taxation. I am 63 with 48 years of earnings so nothing much to be gained here.
QBI can also get reduce by high enough total income (something over $300k maybe?) if the business is a certain type of business. Look up specified service business rules if this might apply to you.
We are well under the MFJ limit to be able to take advantage with our qualified business.
Statistics: Posted by Workinprogress — Sat Dec 21, 2024 1:26 pm — Replies 2 — Views 63