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Partners in QBI range should NOT contribute to a partner HSA? 80% deduction?

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  • Partners in QBI range should NOT contribute to a partner HSA? 80% deduction?

    I just became partner in a practice and switched from a w-2 to a partner on a k-1 last year. In doing my taxes I used an accountant but I also think I noticed something that if true, seems to be a fairly big deal to many people including physicians in a partnership agreement. I am asking this accountant but I am not sure they are understanding my point, I figured I will ask here, because this might apply somewhat broadly to others, and I have not noticed this wrinkle mentioned in the personal finance blogosphere. I think this will apply to anyone under the QBI phaseout limit, has a high-deductible health plan with an HSA, and that is a partner getting a k-1 with minimal guaranteed payments. I edited out some exact numbers.

    Please see if I am understanding all these steps correctly? HSA contributions as a partner in my partnership are not reported on line 1 of my k-1, but they are included as part of the guaranteed payments on line 4c. The summation of line 1 and line 4c is what is placed on line 14 on my k-1 as self-employment earnings. This amount $18x,xxxx for me in 2021 is transferred to both my schedule E and my schedule SE where both values in my case this year are reduced by my unreimbursed partner expenses to $17x,xxx.. This partner income from schedule E ends up via schedule 1 on my 1040 after the HSA contribution is deducted along with 401k contributions, 1/2 self-employment taxes, and health insurance on schedule 1.

    So, I end up getting credit for the HSA contributions against my taxable income on schedule 1, BUT, unlike my 401k contributions or health insurance premiums I can directly contribute to my HSA outside of the partnership structure and still get the full credit for the deduction on schedule 1 via form 8889.

    However, it looks like the guaranteed payments of both health insurance premiums and HSA contributions through the partnership do NOT avoid self-employment taxes or additional Medicare taxes from form 8595? If I contribute directly to the HSA myself outside of the partnership I also have to pay the self-employment and Medicare taxes on the contributions as it would just increase my schedule k-1 line 1, so this is tax neutral.

    So, do I pay self-employment taxes and additional medicare taxes as a partner on HSA contributions no matter how I contribute (individually or through the partnership)? It appears to me I do.

    Why this matters, is how guaranteed payments on my partner k-1 appear to affect QBI. I want my QBI number to be as large as possible since my taxable income is below the QBI specified service trade participant next year $340,000-$440,00ish phaseout range.

    It appears to me that guaranteed payments (and 401k contributions) are backed out of the QBI total as the $133,xxx that you have on my QBI after deduction statement total after k-1 line 14a self-employed earnings of $17x,xxx - $1xxx UBE - $1xxxx guaranteed payments - $34xxx 401k contributions = $133,xxx. This appears to turn in my situation items that are normally 100% deductible like self-employed health insurance premiums, 401k contributions, 1/2 self employment taxes, and HSA contributions into only 80% deductible after taking into account the loss of the 20% QBI deduction on them. Is this correct?

    If true, this is important for the value of 401k traditional vs roth 401k contribution decisions as well as the traditional 401k contributions in this situation appear to be deducted at only a net 80% value, but withdrawals will be taxed at 100% in the future, which might make at least some roth401k contributions more valuable in this situation?

    For HSAs though, the situation appears clear if my understanding here is correct. HSA contributions look to be fully taxed at medicare 2.9% tax rates and 0.9% additional medicare tax rates as a partner REGUARDLESS of whether I contribute through the partnership or individually?

    Both contributing through the partnership or individually my HSA are deductible against taxable income? This is somewhat unique to HSAs versus health premiums or 401k contributions.

    BUT if I contribute to my HSA through the partnership, my QBI is reduced by the HSA contribution, while my QBI would not be reduced if I just contributed to the HSA directly? If so, that is a net 20% tax difference on the yearly $7300 HSA contribution. When I contribute to an HSA inside the partnership, I lose out on $7300 of QBI for tax year 2022 that I could gain contributing outside the partnership, or $1460 in deductions?

    If true, this seems like a very big deal that I am very surprised hasn't been published about extensively in the personal finance world. I imagine this might apply to a fair number of people other than my own personal situation?

    So, going forward I can remedy this situation my immediately ceasing partnership HSA contributions and instead directly contributing to the HSA?

  • #2
    Not to minimize your concerns but I don't think this is THAT big a deal.

    First, the reduction in your QBI is the $7K or $8K HSA contribution... so the maximum reduction in your QBI deduction is 20% of this. So $1400 to $1600. And you're right, if you're in the phase-out range, your marginal rate is maybe 40-45%... so it's $640 or $720 of lost tax savings. Something like that.

    But what partnership or its accountant may have thought is they want to treat the HSA stuff (for everyone, partners and employees) the same way. They may even need or feel they need to treat it that way for ACA purposes? (I don't know. Just throwing that out.)

    And then the other thing is, partners' QBI deductions aren't equal to 20% of the QBI but the lesser of 20% of QBI or 20% of taxable income. The HSA does always reduce your taxable income. So maybe people ran the numbers and figured it didn't actually matter? (Just an idea.)
    Stephen L. Nelson, CPA, MS-tax, MBA-finance - Partner
    Nelson CPA PLLC | s[email protected]