No. 1 Misconception of the New Tax Law

26th Feb 2019

Although the Tax Cuts and Jobs Act (TCJA) has lowered tax rates for C corporations, it has created a common misconception – that all business owners will get tax breaks. Many taxpayers, who have already filed their 2018 taxes ahead of the April 15 deadline, have been surprised to learn that their tax return is lower and they owe money to the IRS.

In addition, average tax refunds are 8.4 percent less compared to this time last year, according to statistics released from the IRS. The new tax law nearly doubles the standard deduction amount, which was expected to reduce taxes for about 65% of taxpayers. However, taxes will be raised for about 6 percent of households, according to the Tax Policy Center.

While there’s a myth that all small business owners will benefit from the new tax reform bill, there is still a viable tax strategy. If high income small businesses – mainly owners of S corps, partnerships and sole proprietorships – are looking for a large tax deduction, then the new tax law makes high contribution retirement plans more valuable, by offering large “above the line” tax deductions for certain clients.

Defined Benefit and Cash Balance plan deductions may qualify business owners of pass-through entities to take the Section 199A 20% deduction by reducing taxable income below the $160,700 threshold ($321,440 if married, filing jointly) for 2019 and lower their tax bracket. This can potentially save them tens of thousands of dollars in tax liability.

See how much you can contribute and save on taxes with a Defined Benefit plan using our online DB calculator. Learn more about how the new tax law affects high income and self-employed business owners.

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