With tax season in full swing, business owners can take a moment to stop working in their business and focus some attention to working on their business. The changes from the 2017 Tax Cut and Job Act are in place, at least until the end of 2025 as it stands, and there are opportunities for the self-employed to implement tax and retirement planning strategies. The correct mix of wages, pre-tax contributions and tax efficient vehicles can help you keep income tax obligations in check and prepare for your desired retirement.
Capitalize on the 199A deduction
One of the biggest opportunities is for owners of pass-through entities to apply a 20 percent deduction to Qualified Business Income (QBI). The QBI of S-Corps, LLCs, Sole Proprietors and Partnerships is equal to the net amount of qualified items of income, gain, deduction and loss with respect to qualified trades or businesses.
For 2018, a full deduction is available to taxpayers with incomes below $157,500 for individual filers and $315,000 for joint filers. Specialized service firms, including lawyers, financial planners, consultants and doctors face income limitations where the deduction phases out completely. It is imperative to know the phase-out ranges and get under those ranges, if possible. For some, it might make sense to purchase property instead of renting to capitalize on the 199A deduction. For others, a change in retirement plan might be in order.
Re-evaluate retirement plan options
For many small businesses, the SIMPLE IRA or SEP IRA does the trick when it comes to retirement plan savings. However, using a 401(k) allows greater yearly savings, while leaving less taxable income to the business. To project which retirement savings option leverages tax savings benefits, some business owners might consider an analysis where they compare matching or profit-sharing contributions on behalf of employees. In short, business owners should consider whether it is better to pay the taxes or pass some of that money along to workers. Another option to considers is a defined benefit plan. This is especially beneficial for those nearer to retirement and working solo or with few employees. This could mean putting over $300,000 toward retirement while reducing QBI by that much for 199A deduction purposes.
Rental real estate owners, rejoice
Owners of rental real estate are big winners in the new tax law, assuming they qualify as a trade or business by meeting the 250-hour requirement. Some of the activities that count toward the time requirement include negotiating and executing leases, collecting rent, managing the properties and maintaining and repairing the properties. Owners can also combine multiple properties.
Forecast retirement income
It is never too early for the self-employed to map out future income in retirement years. The taxability of Social Security benefits and the Medicare Surcharge Tax depends on a range of income, and business owners should know those ranges. For example, an extra dollar in taxable income can lead to an exorbitant increase in Medicare premiums. Sources of income that can help reduce income in these ranges include the use of Roth IRAs, limiting Required Minimum Distributions and taking loans against life insurance policies and real estate. This combination of planning pre and post retirement will help minimize taxes and ensure income is maximized.
For additional help maximizing the advantages of the new Job Cuts and Jobs Act, consider working with a CFP® professional.