Tax Reform Update: Pass-Through Deduction & Qualified Retirement Plans

The tax reform passed in 2017 will affect many of our clients. Popular deductions, like mortgage interest and SALT (state and local tax), were capped.  And the personal exemption was eliminated.

Luckily for us, Congress did not change any deductions related to qualified retirement plans. As an individual, contributing to a retirement plan is a great way to obtain a tax deduction and save for retirement. As a business owner, setting up a retirement plan, like a SEP IRA, 401(k), Profit Sharing Plan, or Defined Benefit Pension, provides one of the largest tax deductions available. Business owners can potentially put away $100,000s each year, fully tax deductible.

I was recently featured in an article discussing the new 20% pass-through deduction(section 199A) and the benefits it can provide business owners. If you are eligible, this new pass-through deduction can create large tax savings. Unfortunately, many business owners in “Service Businesses” may not be eligible because their income is too high. If you are in this group and your income is above $315,000, then you need to lower it in order to take advantage of the new pass-through deduction.

A qualified retirement plan, is one of the best ways to lower your taxable income. Below is an example of how it works. In this scenario, the retirement plan contribution delivers 3 HUGE benefits:

1) The $100,000 contribution is fully tax deductible for the owner

2) A large % of that contribution will fund the owner’s retirement

3) The owner is now eligible for the pass-through deduction because their income is below $315,000

  Business Owner Business Owner
   with NO WITH
  Retirement Plan Retirement Plan
Business Owner’s Net Income $415,000 $415,000
Contribution to Qualified Retirement Plan $0 $100,000
Taxable Income Before Pass-through Deduction 415,000 $315,000
Pass-through Deduction NOT ELIGIBLE $63,000
Taxable Income $415,000 $252,000