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Nearly 3 million more business owners last year requested a 20% tax deduction on their income compared to the previous filing season, according to IRS data.
Around 21.2 million tax returns required the deduction of “qualified business income” during the tax season last year, which reflected the income for 2019. This is an increase compared to 18.4 million tax returns in the previous year.
With the law on tax cuts and employment signed by former President Donald Trump in 2017, the so-called pass-through deduction was introduced.
The tax break allows owners of pass-through businesses such as sole proprietorships, partnerships, and suburban companies to deduct up to 20% of their business income from taxes.
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The income from such transactions is incorporated into the individual tax returns of the business owner.
However, some complex rules apply to the 20% deduction. For example, service companies like doctors, lawyers and accountants may not be eligible if their taxable income exceeds a certain threshold.
That income cap in 2020 was $ 213,300 for single applicants and $ 426,600 for married couples filing a joint tax return.
“Taxpayers are becoming more familiar with the rules,” said Steven Rosenthal, Senior Fellow at the Urban-Brookings Tax Policy Center, of the surge in tax returns claiming the tax break.
“The deduction is generous, but sometimes requires structuring [on the part of the business owner]”, he added.” Taxpayers have to plan for that. “
While the number of tax returns claiming the 20% tax credit has increased significantly, the total amount of the deduction has not increased significantly.
According to IRS data, entrepreneurs claimed a total of nearly $ 150 billion in deductions for the 2019 tax year, up from $ 146 billion the previous year.
The IRS reported dates for tax returns by December 31, 2020 and November 21, 2019, respectively.
“There’s no obvious reason for the postponement, as is sometimes the case, for example, due to a change in law or reporting change,” an IRS official said of the increase in returns that claimed the 20% deduction.
One such dynamic occurred after the 2017 tax law, for example, doubled the standard deduction, the official said. The number of taxpayers claiming the standard withholding instead of listing their tax returns rose sharply the following year, he said.
The pass-through deduction will expire after 2025 unless it is extended by Congress.
The Tax Cuts and Jobs Act gave individuals temporary tax breaks. It offered a permanent reduction in corporate tax rates from 35% to 21%.
Meanwhile, President Joe Biden unveiled his $ 2 trillion infrastructure proposal on Wednesday. The initiative would be funded through an increase in the corporate tax rate to 28% and measures to prevent profits from being offshored.