As the end of the year approaches, many people are wondering what their tax bill might look like for 2013, and if there is anything they can do before year-end to mitigate tax increases. Some individuals will see dramatic tax increases when they file for 2013 due to:
1. An increase in individual tax rates from 35% to 39.6%;
2. A .9% Medicare tax on earned income;
3. An additional 3.8% Medicare tax on passive income;
4. A 3% of AGI reduction in itemized deductions; and
5. An elimination of personal exemption deductions.
Because of these increases, many taxpayers will be looking for ways to shelter income and save taxes. It is not too late to consider re-designing existing 401(k) profit sharing plans or establishing a defined benefit plan to help offset potential tax increases. Consider the following opportunities for a defined benefit plan:
1. Professional service corporations and other small or medium sized businesses. A defined benefit plan paired with an existing 401(k) profit sharing plan can provide substantial benefits for owners or key employees with minimal additional benefits for rank-and-file employees.
2. “Other” earned income not generated by the primary employer. Sources of income that can be paid directly to an individual or a separate entity owned 100% by an individual (e.g., director fees or unrelated consulting fees) can be sheltered by a 401(k) profit sharing plan or defined benefit plan.
3. Sole Proprietors. We can assist with the establishment of a defined benefit plan for sole proprietors with significant income.
4. New non-controlled group entities. Those with newly established entities that receive income from unrelated third parties or from a related, but non-controlled group entity. Under these circumstances, a new 401(k) profit sharing plan or defined benefit plan can be established to help shelter income.
For more information on utilizing these tax mitigation options, contact Bill Edwards, Chair of the Qualified Plan Administration and Consulting Group at Clark Schaefer Hackett at [email protected].
For more information please review these related articles: