> Home
   > Contact Us
   > Disclosure
 
Home
Wealth Management Services
Who We Serve
About Centricity
Client Center
Resources
Featured News
Articles Of Interest
Financial Briefs
Market Data
Contact Centricity
 
More Articles  Printer Friendly Version

 

A Timely Tax Tactic For Business Owners

Dentists, doctors, and other business owners can slash their tax bill and funnel huge savings into tax-advantaged retirement vehicles with planning. This is a time-sensitive tax tactic that you might optimally want to implement before the end of this year.

To illustrate how it works, consider a dentist in her peak earnings years, with $500,000 of income. She's married and her children are out of the house. She is in the 35% federal tax bracket, biting deep into her income.

A potent antidote is establishing a federally tax advantaged defined benefit in her practice or joining with her partners in one. Money she salts away into qualified retirement plans is subtracted from her taxable income, reducing her tax bill for this year, and it enables her to manage her tax bracket to optimum advantage.

Defined benefit (DB) plans have been qualified under the federal tax code for special treatment for decades, but they are not nearly as popular as defined contribution (DC) plans.

Because your contribution is defined — but not your retirement benefit — DC plans pose less financial risk to employers and are much more popular with large companies. Guaranteeing a defined benefit on a retirement plan is riskier, so Uncle Sam imposes much higher contributions and more elaborate rules on a DB plan than on a DC plan.

In 2018, the maximum contribution to a DB plan is $220,000 versus $55,000 for a DC plan. If our dentist has a DC plan already but now adds a DB plan, she could reduce her taxable income by as much as $275,000! However, socking away so much would make it impossible to meet her current expenses, so she will need to reduce the amount she contributes while optimizing it for maximum income tax savings.

Our dentist could put $185,000 into the retirement accounts, for instance, just enough to reduce her taxable income to $315,000 and putting her in the 24% tax bracket instead of the 35%.

And because the dentist is a partner in the business, she also qualifies for a 20% deduction under the Sec. 199 (A) of the new tax code for owners of small business that are S corps, LLCs, sole proprietorships, or other pass-through entities. To get this extra tax break, her taxable income must not exceed $315,000 for a married couple ($157,500 for a single).

Twenty percent of $315,000 works out to a deduction of $63,000, placing her taxable income at $252,000, firmly in the middle of the 24% bracket. The taxes are a lot lighter than if she hadn't taken steps to whittle down that half a million in income, and she has socked away a large defined benefit for retirement.

Setting up a defined benefit plan requires expert help and careful planning but is a great tactic to consider this year, especially because of 20% tax deduction.


Email this article to a friend


Index
Forget Everything You Know About Inflation
China Trade War Sparks Fear But Not Stock Losses
Surprisingly Good Productivity, Jobs, Inflation And Trade News
Stocks Break Record High On Economic Surprises
U.S. Leading Indicators, Retail Sales, And Atlanta Fed Forecast Signal Strength
S&P 500 Closes Near Record High Amid Growing Ebullience
An Early Indication The Economy Is Stronger Than Expected
A Spectacular Quarter For U.S. Stocks Just Ended
Real Economy Strengthens, Yield Curve Inverts And Mueller Report Drops
Despite Crises, Economic Fundamentals Are Strong
How Misperceptions Spread And Cause Confusion On Money Matters
Real Spending Power Grew Twice The Rate Of The Last Expansion
Global Growth Forecast Slows, But U.S. Outlook Remains Stable
How Long Does It Take To Be A Long-Term Investor?
Five Observations About The CBO's New Long-Term Debt Forecast
Fed Apology, Strong Job Growth Bolster Stocks

This article was written by a professional financial journalist for Centricity Wealth Management and is not intended as legal or investment advice.

©2019 Advisor Products Inc. All Rights Reserved.
© 2019 Centricity Wealth Management | 515 Executive Campus Dr., Suite 100, Westerville, OH 43082 | All rights reserved
P: 614-392-5155 | info@centricitywealth.com |
Privacy | Form ADV | Disclosure | Contact Us | Home

Centricity Wealth Management, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Centricity Wealth Management, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Centricity Wealth Management, LLC unless a client service agreement is in place.