How the TCJA Law Affects High Income and Self-Employed Business Owners
The Tax Cuts and Jobs Act (TCJA) made several significant changes to the tax code. The law includes several aspects that affect high income small business owners and self employed individuals.
The tax law increases the value of high contribution retirement plans like Defined Benefit & Cash Balance plans, offering large “above the line” tax deductions for certain clients. Cash Balance and Defined Benefit plans can potentially bring your small business and self-employed clients below the taxable income thresholds ($364,200 married tax payer, $182,100 single tax payer in 2023) and save them tens of thousands of dollars in tax liability. In many cases, these deductions lower taxable income sufficiently to qualify the tax payer for the additional 20% deduction and even lower their tax bracket.
Sole Proprietor Opens Defined Benefit + 401(k) Plan to Build Retirement Wealth
| With a DB + 401(k) Plan | |
|---|---|
| Net Profit: | $500,000 |
| DB + 401(k) Contribution: | $271,000 |
| Qualified Business Income: | $229,000 |
| Pass-through Deduction: | $45,800 |
| Taxable Income: | $183,200 |
| $117,200 Tax Savings* | |
| * Compared to no DB/401(k) and 199A deduction. Assumes estimated 31% federal and 6% state tax rates. This example is based on specific assumptions and is used for illustrative purposes only. | |
PROFILE
James, age 53, is married. He owns a successful financial advisory with no employees. James nets $500,000 (after paying self-employment tax) as an independent financial advisor and would like to retain more of his earnings.
DEDUCTION
As an owner of a pass-through entity, the advisor could qualify for a tax deduction (Section 199A) of up to 20% of his Qualified Business Income if his income is below the $364,200 threshold for married couples.
OBJECTIVE
Build retirement wealth while maximizing tax savings
SOLUTION
Defined Benefit plan and 401(k) for 10 years
Do you have a high-income client like this?
Small Business Owner Opens Cash Balance + 401(k) Plan to Maximize Tax Savings
| With a CB + 401(k) Plan | |
|---|---|
| Net Profit: | $754,360 |
| CB + 401(k) Contribution: | $400,065 |
| Qualified Business Income: | $364,200 |
| Pass-through Deduction: | $72,840 |
| Taxable Income: | $291,360 |
| $152,301 Tax Savings* | |
| * Compared to no CB/401(k) and 199A deduction For Dr. Smith, a Cash Balance and 401(k) Profit Sharing Plan offers a tremendous amount of value both in retirement savings ($390,165 for her, $9,900 for the employees) and tax savings | |
PROFILE
Dr. Smith is 62 years old and married. She has four employees. She generates income through her business and is paid W-2 income. With a healthy income of $754,360 a year, Dr. Smith would be a suitable candidate to use a Cash Balance and 401(k) Profit Sharing plan in order to lower her taxable income
DEDUCTION
As an owner of a pass-through entity, the doctor could qualify for a tax deduction (Section 199A) of up to 20% of her Qualified Business Income if her taxable income is below the $364,200 threshold for married couples.
OBJECTIVE
Lower taxable income to maximize tax savings
SOLUTION
Cash Balance with 401(k) Profit Sharing plan
Do you have a high-income client like this?
White Paper: Making the TCJA Law Work with High Contribution Retirement Plans
Our white paper highlights three aspects of the Tax Cuts and Jobs Act (TCJA) and how they affect tax and retirement planning for taxpayers with pass-through income. The white paper examines these three items:
- Tax Bracket Changes
- Deductions Eliminated or Limited
- Section 199A 20% Deduction for Pass-Through Businesses
Ready to Talk?
Our plan consultants are ALWAYS AVAILABLE, even on weekends by appointment to help you help your clients. CALL: 866-269-2706 or contact us at DBPlans@dedicated-db.com when you have small business retirement questions.