H2R CPA Blog
Tax Reform Resource Center
by Kathy D. Sisler, CPA, CGMA
Before the Tax Cuts and Jobs Act, owners of pass-through entities and sole proprietors embraced the idea of a retirement plan for their employees, since it provided them with a tax deduction and permitted them to set aside retirement money for themselves. If you’re a professional firm, a retirement plan contribution might be an even better idea than before.
There’s been a lot of discussion around the new Qualified Business Income (QBI) tax deduction since the passage of the tax bill. But how does that impact your retirement plan if you are a pass-through business owner like an S-Corporation, an LLC or a sole proprietor? What if you are a specified service business?
The 20% deduction is limited in 2018 for owners with income greater than $315,000 (married) or $157,500 (single). Once income exceeds $415,000 (married) or $207,500 (single) the deduction is completely eliminated. Remember, if your income is under the threshold, you get the entire deduction, regardless if you are in a service industry or not. Making a retirement plan contribution can drive income down, allowing not only money to be set aside for your retirement, but driving your income under the threshold for the 20% deduction.
For example, Rob is 50 years old, married and is a partner in a service firm. His share of the profits are $375,000. By maxing out his 401(k) contribution and maximizing his profit sharing contribution of $60,000, his income drops to $315,000 and he is now entitled to a 20% QBI deduction of $63,000. Federal income tax on his taxable income is $43,299 instead of $66,468 computed without the 20% deduction. Rob has saved $23,169 in income tax, contributed $60,000 to his retirement and has reduced his taxable income by $93,232.
Members of firms with even higher profits might benefit from other types of plans which permit them to contribute larger amounts to their retirement. Of course, establishing a new plan entails time and money, but the savings could well outweigh the effort and cost.
There is just about one month left to establish a plan for 2018 and each person’s circumstances are unique, requiring some planning and decision making and a signed plan document before December 31st.
Contact H2R CPA at 412-391-2920 or firstname.lastname@example.org if you have questions about your individual or business tax planning.
Recommended Reading: Qualified retirement plans can provide additional tax savings for business owners
by H2R CPA Team
Because qualified retirement plan contributions lower the taxable income of business owners of passthrough entities (sole proprietorships, partnerships, S corporations, and LLCs), increasing contributions can qualify business owners for additional tax deductions under the Tax Cuts and Jobs Act that they would not otherwise have been eligible to receive, such as the new qualified business income (QBI) deduction (Sec. 199A).
See article below from the AICPA website for details and contact H2R CPA at 412-391-2920 or email@example.com with any questions you may have.
Why small business owners should have a qualified retirement plan
by H2R CPA Team
The “sandwich generation” accounts for a large segment of the population. These are people who find themselves caring for both their children and their parents at the same time. In some cases, this includes providing parents with financial support. As a result, estate planning — which traditionally focuses on providing for one’s children — has expanded in many cases to include aging parents as well.
Including your parents as beneficiaries of your estate plan raises a number of complex issues. Here are five tips to consider:
1. Plan for long-term care (LTC). The annual cost of LTC can reach well into six figures. These expenses aren’t covered by traditional health insurance policies or Medicare. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.
2. Make gifts. One of the simplest ways to help your parents financially is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion, which allows you to give each parent up to $15,000 per year without triggering taxes.
3. Pay medical expenses. You can pay an unlimited amount of medical expenses on your parents’ behalf, without tax consequences, so long as you make the payments directly to medical providers.
4. Set up trusts. There are many trust-based strategies you can use to financially assist your parents. For example, in the event you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.
5. Buy your parents’ home. If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, be sure to pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.
As you review these and other options for providing financial assistance to your aging parents, try not to overdo it. If you give your parents too much, these assets could end up back in your estate and potentially exposed to gift or estate taxes. Also, keep in mind that some gifts could disqualify your parents from certain federal or state government benefits.
Contact H2R CPA at 412-391-2920 or firstname.lastname@example.org to learn more about how we can assist you with your Estate Planning needs. Our team would be pleased to provide a complimentary consultation.
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For additional insight and expertise, visit the following blogs from some of our CPAAI member firms:
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