How Can the Tax Cut and Jobs Act Benefit You?

Everyone is trying to figure out how the new Tax Act affects them.  Have you determined whether your tax bill will go up or down? As a business owner, it’s up to you to not only earn money to support your lifestyle but to set aside sufficient money to pay for taxes, business expenses and fund your future retirement. Getting the most use out of what you earn is key.

The Tax Cut and Jobs Act of 2017

Section 199A of The Tax Cut and Jobs Act of 2017 provides a brand new 20 % deduction of qualified business income for certain pass-through businesses.  

Pass-through entities include:

  • Sole proprietorships (no entity, Schedule C)
  • Real estate investors (no entity, Schedule E)
  • Disregarded entities (single member LLCs)
  • Multi-member LLCs
  • Any entity taxed as an S corporation
  • Trusts and estates, REITs and qualified cooperatives

However, personal service businesses lose this deduction when their taxable income exceeds the following thresholds:

  • $157,500; phased out by $207,500 for single taxpayers
  • $315,000; phased out by $415,000 for married filing joint payers.

Section 199A service businesses include the following:

  • Brokers
  • CPA’s
  • Attorneys
  • Athletes
  • Financial Advisors
  • Doctors and Dentists
  • Consultants
  • Performing Arts

When income exceeds the phase-out threshold the 20% deduction is lost.  Making a contribution to a qualified plan can create a deduction that will bring taxable income below the phase-out threshold regaining the 20% deduction in addition to the deduction for the qualified plan contribution.  

SAMPLE

Mark and Cindy, consultants, are both 60 years old and making $600,000 in combined net business income. They file their tax return as married, joint.

  • Mark and his wife can contribute $405,000 to a Fully Insured 412(e)(3) Defined Benefit Plan
  • Mark and Cindy get a full deduction for the $405,000 Fully Insured 412(e)(3) Defined Benefit Plan contribution and will also qualify for an additional Section 199A deduction of $39,000.
  • Contributing to the Fully Insured 412(e)(3) Defined Benefit Plan contribution reduces their current tax liability by $175,680
  • Tax savings add up to $878,400 by the time Mark & Cindy turn 65
  • Mark and Cindy will be able to retire at age 65 with a combined pension income of $170,908 per year and will have lump sum balances totaling $2,068,240.

* Guarantees dependent upon the claims-paying ability of the issuing company. This example is for illustration purposes only. Please consult with your CPA to calculate your tax savings.

For Mark and Cindy, the decision to implement a Fully Insured 412(e)(3) Defined Benefit Plan or not is a $2,946,540 decision! They can either pay $878,400 in taxes over the next 5 years, or they could save $2,068,140 in their Fully Insured 412(e)(3) Plan.

The adoption of a Fully Insured 412(e)(3) Defined Benefit Plan meaningfully reduces the estimated current tax liability and brings their taxable income below the new 199A deduction threshold limits regaining the 20% deduction. The Fully Insured 412(e)(3) Defined Benefit Plan also created significant pension income without market risk.

Think about your situation.  

  • Will you keep your 20% deduction?
  • Do you want to meaningfully reduce your current tax liability?
  • Do you want the IRS to help you accumulate assets for your retirement?
  • Would you like a secure pension income with peace of mind?

At Soterian, we have assembled an All-Star team of professionals to assist our clients with all of their business planning needs – particularly to mitigate taxes.  Jim Hiza and Mary Read are trusted Soterian Strategic Partners and are working with Soterian clients to evaluate and construct a plan for how to maximize the amount of money they keep.  

Contact us today to get your customized plan.

Jim Hiza, CPA educates CPA’s, small business owners and estate planning attorneys on how to utilize the Tax Code to meaningfully reduce current tax liability and accumulate wealth. Mr. Hiza holds an NC CPA license # 27254. Mr. Hiza has more than 20 years of financial planning and investment management experience working with families and business owners.

Mary Read CPC, QPA, CPFA is National Director of Pension and Protection Planning at Pentegra Retirement Services and partner of M & R Business Development Group.  A leading authority in qualified retirement plans with more than 30 years’ experience, Mary has an extensive background in plan design and development. Mary is a frequent speaker on qualified plans and contributor to industry publications.  Among her credits, she has taught pension classes across the country for major financial institutions and been a featured speaker at national meetings. Mary is the author of the book My Business is My Main Asset.  I Want to Retire. Benefiting from a Plan.

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