Blog
January 2, 2019
Tax Cuts and Jobs Act – Will You Get the new 20% Tax Deduction?
If you might not have heard yet, a new tax law was put in place this year. The new law offers a 20% tax deduction to owners of pass-through entities such as sole proprietorships, S corporations, and partnerships. The deduction limited specified service businesses including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial, brokerage, or any business where the principal business is the reputation or skill of one or more of its employees.
The phase-out applies to taxable income between $157,500 – $207,500 for single taxpayers and $315,000 – $415,000 for married taxpayers filing jointly.
This is very good news for your retirement planning, since contributions to retirement plans do not count as income under the phase-out. Business owners can reduce their taxable income using a profit sharing, cash balance, or defined benefit plan.
As an example, Bruce is married, he is 55 years of age, and he owns a consulting firm as a sole proprietor. During 2018, Bruce’s net Schedule C income was $500,000. Without a plan, his income is beyond the joint filer phase out of $315,000. By adopting a defined benefit plan before the end of 2018, Bruce can make a $200,000 tax deductible contribution to a defined benefit plan. This would lower his taxable income to $300,000 and he would then qualify for the 20% tax deduction.
The new tax rules are complex and can be confusing, so we encourage you to contact your CPA to learn how a retirement plan contribution can help save taxes and put more dollars away for your retirement.
For an illustration of how much you can save in a Defined Benefit or Cash Balance Pension plan please call you BEI sales consultant at 800-899-9141 or email us at planservices@benefitequity.com.
Author: Robert Gorelick, APA, Founder Benefit Equity Inc.