Need a 401(k) Tuneup?
Business owners with income greater than $400,000
could experience greater tax dissonance in 2021. Loss of Qualified Business
Income Deduction (QBI) and an increase in Capital Gains tax is just the start.
If you want to bring harmony to your taxes, consider adding a Cash Balance Plan to your 401(k) and Profit Sharing Plan.
Orchestrating your 2021 taxes may be more difficult than in previous years. Under the Biden plan, income greater than $400,000 will likely revert to 39.6 percent, the top rate before the Tax Cuts and Jobs Act passed in 2017. Other rollbacks could include the 21 percent corporate tax, a new corporate alternative minimum tax as well as increasing social security taxes and capital gains rates on income above $400,000.
What is a Qualified Business Income Deduction AKA QBI?
For small-business owners who are high-wage earners, discovering strategies that reduce business income is like creating your music play-list where every song brings you joy and smiles and maybe even a cha-cha.
A popular business deduction found in the Tax Cuts and Jobs Act of 2017 called QBI (Qualified Business Income Deduction) for qualified business owners, can be an elegant way to reduce your total taxable income by 20 percent. However to be eligible to deduct up to 20 percent of your qualified income, total taxable income in 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify.
If you have maxed out your 401(k) and profit-sharing and your income still isn’t in the range for a QBI deduction, you may wish to explore the pros and cons of adding a Cash Balance Plan on top of your 401(k) and Profit Sharing plan.
What is Capital Gains Tax?
Capital Gains Tax is a government tax on the profit made from selling certain types of assets. These include stock investments or real estate property.
The Capital Gains rate was first introduced in 1913 and was taxed at ordinary rates, initially up to a maximum rate of 7%. The rate has been all over the map since then. In 1986 the maximum rate was 28%. Here are the Capital Gains Tax thresholds for 2021.
Capital Gains Tax Rate | Taxable Income (Single) | Taxable Income (Married Filing Jointly) |
15% | $40,401 to $445,850 | $80,801 to $501,600 |
20% | Over $445,850 | Over $501,600 |
What is a Cash Balance Plan and how can it help?
A cash balance plan is generally used by businesses with multiple owners who have stable surplus income and are interested in larger tax deductions and accelerated retirement savings. A cash balance plan is a type of a defined benefit plan that resembles a 401(k); however it allows contributions that typically far exceed the limits of a 401(k).
Here are a few facts about Cash Balance Plans.
- Cash Balance Plans have been around for decades and were first approved by the IRS in 1989.
- Cash Balance Plans are flexible. This is important because not every owner or partner of a firm has the same appetite for tax deferral. Cash Balance Plans can be customized.
- Cash Balance Plans are portable- it’s YOUR money. When you retire, or if you leave the firm, you can roll your account value into your personal IRA.
- Cash Balance Plans require fairness- there’s a give to get. As in any IRS governed business plans your employees will need to receive a contribution between 5 -7.5% of their pay for owners to enjoy the sizable tax deductions you receive with a Cash Balance Plan.
To see if a Cash Balance Plan is right for your organization, schedule a 15-minute call with Jaimie Blackman.