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Mistakes clients make to reduce income is their failure to maximize deferrals and contributions to retirement plans



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Mistakes clients make to reduce income is their failure to maximize deferrals and contributions to retirement plans

Credit: TaxSpeaker.  Taxspeaker® provides education to tax, legal and financial professionals in all 50 states, as well as several foreign countries. As the only continuing education company whose manuals ever won the coveted CPA Practice Advisor Reader’s Choice Award (4 years in a row!), Taxspeaker® is known for its industry-leading manuals, expert and energetic speakers, and award-winning research and compliance checklists and guides.

To learn more, visit TaxSpeaker.com.

The single most common mistake we see from clients wishing to reduce their income tax burden is their failure to maximize deferrals and contributions to retirement plans. Whether the plan is a 401-K, 457, 403-B, SARSEP or Simple-IRA, the client desiring tax savings MUST maximize deferrals to these plans. Most employers have matching programs for some portion of the 401-K deferral and failure to maximize the deferral misses this benefit of free money from the employer.

Maximum deferrals for 2019 are:
$13,000-SIMPLE IRA & SARSEP (plus $3,000 over age 49 catch-up)
$19,000-401-K, 403-B, 457 (plus $6,000 over age 49 catch up)

One of the single best tools for tax planning is to take the deferral type plans and double-dip when working for two unrelated employers. The maximum deferral is the most that may be deferred by 1 taxpayer in the year 2019 for all deferral plans (Simple & 401-K & 403-B) even if with different employers ($19,000). However, this taxpayer’s maximum deferral rule does not apply to participants in 457 plans under IRC Section 402(g)(3).

The limits on deferrals are applied per taxpayer, but the limit on employer contribution amounts are applied per employer. The only employer limit is the maximum contribution rule limiting the employer to the lesser of 25% of compensation or the current year limit.

Example 1:

Walt Whitman works for Yosemite, Inc. for the first six months of the year and defers his maximum amount of $19,000. Yosemite deposits the maximum amount for Jack of $37,000 to hit the maximum contribution for the year for Jack of $56,000 for 2019. The employer deposit rule is applied as:

The maximum contribution from all sources this year: $56,000

Plus over 49 catch-ups, where applicable: 0

Less employee deferral – 19,000

Equals employer maximum contribution: $37,000

On July 1, 2019, Walt leaves Yosemite and goes to work at Teton. Walt is unable to defer any more money this year because he has hit the taxpayer maximum deferral from all sources for 2019 of $19,000. However, Teton, a separate independent company from Yosemite, applies the employer limit and contributes $56,000 for Walt as follows:

The maximum contribution from all sources this year: $56,000

Plus over 49 catch-ups, where applicable: 0

Less employee deferral – 0

Equals employer maximum contribution: $56,000

Assuming Walt earns at least $224,000 at Teton this year he needs to participate in the 401-K but not defer since ($224,000 x 25% =$56,000) and if WorldCom decides to make a 401-K profit sharing contribution Walt may receive up to $56,000.

Summary. In this case, Walt would be able to deposit, between his own deferrals and the employer contributions, $112,000 this year! (19,000 + 37,000 + 56,000).

Example 2:

What if in Example 1 above, Walt left Teton before year-end and went to a third employer? In the wildest case scenario, Walt would again be unable to defer anything because he has hit the maximum taxpayer deferral limit for the year, but the employer could still deposit up to $56,000 in Wat’s 401-K.

Example 3:

What if in Example 1 above, Walt left Yosemite before year-end and went to work for the State of California and participated in their 457 plan? The maximum annual taxpayer deferral rule does not apply to 457 plans as noted, and Walt could defer another $19,000 with the State of California 457 plan, for a total 2019 deferral of $38,000!

Example 4:

What if in Example 1 above, Walt never left Yosemite, but instead started his own consulting business for deferred tax calculations. Could Walt set up a 401-K personally?

Because Walt’s consulting business is unrelated to Yosemite, he could set up a new 401-K, defer nothing, but he could deposit the employer maximum of $56,000 if he made at least $224,000 in the consulting business. (Remember the employer deposit is limited to 25% of compensation). This provides Walt a much better benefit than establishing nearly any other type of retirement plan for his part-time business.

Example 5:

What if in Example 1 above, Walt started his own consulting business but established a SEP-IRA: could he deposit $56,000 in it? Yes, again because it is an independent company. We prefer the solo 401-K because of the availability of an over age 49 catch-up that is not available to the SEP.

Could Walt establish a SIMPLE-IRA? Again yes, but he could not defer anything because he has already hit the annual taxpayer deferral limit at Yosemite. He could put in 2% of compensation into the SIMPLE, but the 401-K allows 25% and both are voluntary, so the 401-K is again the better choice.

Source: TaxSpeaker, 4403 Hamburg Pike, Suite B – Jeffersonville, Indiana 47130

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Manning & Associates and/or MANNINGTAX.COM.  This information is published for informational purposes only.


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Internal Revenue Code Section 199A – introduced a new 20% deduction against “trade or business income” for individuals…



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Internal Revenue Code Section 199A – introduced a new 20% deduction against “trade or business income” for individuals…

Credit: TaxSpeaker.  Taxspeaker® provides education to tax, legal and financial professionals in all 50 states, as well as several foreign countries. As the only continuing education company whose manuals ever won the coveted CPA Practice Advisor Reader’s Choice Award (4 years in a row!), Taxspeaker® is known for its industry-leading manuals, expert and energetic speakers, and award-winning research and compliance checklists and guides.

To learn more, visit TaxSpeaker.com.

When Congress added Internal Revenue Code Section 199A to the law it introduced a new 20% deduction against “trade or business income” for individuals and the rare estate or trust. This deduction was meant to equalize tax rates for individuals versus that used for regular or “C” corporations and their new 21% flat Federal income tax rate. The IRS was charged with the unenviable task of writing Regulations to guide taxpayers and preparers through the maze of conflicting information.

The new law, and the IRS’ Regulations both reference something called qualified trade or business income in Regulation 1.199A(c)(1) and define it as “the net amount of qualified items of income, gain, deduction and loss with respect to any qualified trade or business of the taxpayer.”  Then, further reading to Regulation 1.199A-1(b)(14) defines a trade or business as a trade or business under Internal Revenue Code Section 162. This unbelievably poor definition leads us to Sec. 162 which does not define a trade or business! Thus, the taxpayer is required to refer to other Regulations, notices and, most importantly for rentals, court cases.

Regulation 1.199A-3(b) makes it clear that Schedules C, F and K-1’s from operating businesses all constitute trade or business income. However, guidance on rental activities is poor. Clearly (See IRS Q&A April 2019) self-rental activities qualify for the deduction, as do activities by real estate professionals. Additionally, the IRS provided a “safe harbor” election for some rental property owners to use if they wanted to automatically qualify for the deduction. We strongly pointed out from the podium last year, and continue to point out, that the safe harbor election is not a guide and, in most cases, should not be made or used as a determining factor for whether rental property qualifies for the deduction. Why? Because it excludes nearly every other rental property from qualifying when in most cases the residential rental activity will qualify for the deduction without meeting the safe harbor rules. After one year of tax season experience with this new deduction we believe that few practitioners took the QBI deduction on residential rental property because they believed the safe harbor rules were the required ways needed to qualify when, in reality, they were only 1 of many ways to meet the “trade or business” test.

Before going further, we must advise the reader that any return taking the position that the rental activity qualifies for the deduction must recognize that it is now a trade or business requiring the issuance of 1099’s when applicable, and also applies the QBI rules to losses.

In the IRS’ Summary of Comments and Explanations of the Revisions to the final Regulations the Service declined to provide additional guidance for residential rental activities and essentially left the issue open to a facts and circumstances analyses of every rental activity. Because this lack of guidance leaves the preparer in a blind hole of what to do, the preparer is therefore forced to rely on the only guidance available for trade or business determination for rental activities: US Tax, District and appellate court cases. We believe, based on our exhaustive research of cases involving single family rental activities going back to 1942 that most single family rental activities DO rise to a trade or business level and we will provide an analyses of 15 court cases in this fall’s 1040 in depth classes to prove our argument. Of course, every rental must be analyzed for owner activity, but the preparer should not fall into the “passive activity” trap of IRC Section 469 and look at rental under those rules. In summary, subject to you attending and listening to our analyses in this fall’s classes, we think most single-family rental activities do rise to a trade or business level and do qualify for the 20% QBI deduction.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Manning & Associates and / or MANNINGTAX.COM.  This information is published for informational purposes only.


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August 2019 – IBA Small Business Report



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August 2019 – IBA Small Business Report

In partnership with WAATP; the Independent Business Association of Washington State monitors Olympia and attends legislative sessions on your behalf. IBA keeps you and your small business clients informed with a monthly Small Business Report.

Click here to Download the latest Report and find out what’s happening NOW!

August topics include:

  • Your Paid Family Leave Reporting is Due August 31st
  • Costly New State EAP Overtime Wage Increase Proposed
  • New Paid Sick Leave Policies Released
  • Small Business Fair September 21st in Renton


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  • Address: Manning & Associates, LLC
    2602 N Proctor St #201 Tacoma, WA 98407


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