As a CPA, do you have clients who complain that they’re paying too much in taxes?
This happens a lot with high-earning clients. People who are in the top 1% of taxpayers obviously have to pay a higher chunk of their income in taxes, and there’s nothing they hate more than the government taking away their hard-earned money.
You may have pointed out some of the most common strategies, such as maxing out their IRA and using IRS codes like Section 179, which lets you write off 90% of the cost of your vehicle for employees of your business.
But no matter how many tips and tricks you try, there’s still a limit to how much you can deduct from your clients’ taxes.
What is a Defined Benefit Plan?
Created for small business owners, consultants, and independent contractors, a Defined Benefit Plan is the IRS’ best kept secret for high-income earners.
Once your clients have maxed out their IRA, their 401(k), or other savings retirement plan, a Defined Benefit Plan allows your clients to put away more of their pre-tax income toward retirement.
Here’s what your client needs to do:
Your client needs to qualify for the plan, usually by being a business owner, consultant, or independent contractor.
Your client needs to be able to set aside a large amount of their income over several years.
Your client may want to work with an investment advisor to figure out how much of their income they should set aside. The current maximum annual benefit is $265,000.
Your client sets their planned retirement age as the target date, which is usually at least three years from now.
As long as it meets the minimum requirement amount, your client can customize their contribution to account for fluctuating business revenue.
Your client can adjust their minimum and maximum amounts until their taxes are paid for the previous year. The deadline is Sept 15 of the next year.
Annual contributions get calculated via formulas created by an actuary, based on the business owner’s age. The older they are, the bigger the annual contribution needed to reach their benefit target. So, if your client plans to retire soon, they’ll need to contribute more annually, without exceeding the maximum limit.