Richard Wagner: Business owners, what you keep matters more than what you earn
Now that the election is over and we know who will be running this country for the next four years, I ask myself, “does knowing who won the election tell me what the tax environment will look like next year? Probably not.”
What I do know is that we still have a divided Congress, and barring further legislative action, the Bush era tax cuts will expire Dec 31, 2012. The country is deeply in debt, the economy is sluggish, unemployment is too high, and every taxing jurisdiction I can think of wants more money. I don’t think the government’s insatiable desire for funding will decline anytime soon.
So what is a successful business owner to do? We work too hard and risk too much to earn a living, and at tax time, as patriotic as many of us are, it hurts to write those big tax payment checks. The good news is there are some things you can do to reduce the tax burden, but you’d better act quickly, because the deadlines for some options have already expired and many more will expire at the end of this year.
Here is one of my favorites. I present to you the boring, unassuming pension plan. I know, you already have one, have already looked at one, or you’ve been told you can’t do better than you are already doing. Fortunately for many, I have seen this attitude before and still been able to show clients how to reduce their taxable income by as much as $200,000 to $300,000 per year more than they were previously saving. What does this mean to your bottom line?
To answer that question, we need to know a few things. First, how much money did you make this year? If your overall taxable net income is more than $388,350, congratulations. You made the top tax bracket. What that means for 2012 is that as much as 35 percent of your income may go to the U.S. Treasury, 5 percent to the state of Utah, and your ability to take other deductions may be decreased because of your income.
If this doesn’t get your heart beating, assuming Congress is unable to make any changes and the Bush tax cuts expire, you may be in the 39 percent federal tax bracket, and a new addition called the Medicare surtax increases your Medicare tax rate from 1.45 percent to 2.35 percent. Plus an additional surtax of 3.8 percent is assessed on net investment income (defined as taxable interest, dividends, capital gains, rents, royalties, annuity income and passive activity income).
Oh, and by the way, capital gains rates are going from 15 percent to 20 percent. When you add on the Medicare surtax, that is a whopping 58 percent increase from 15 percent to 23.8 percent on capital gains.
I know, you are not feeling too bad because at least you get to live on half of your income earned over these amounts right? Actually, you still get to pay sales tax, property tax, Social Security tax and a whole host of other taxes as well, but that is for another discussion. Are you ready for some good news?
Well here it is, there are still a few ways left to reduce your 2012 taxable income so that some of the risk, hard work, blood, sweat and tears may be retained for your future benefit. I present you with the lowly pension plan. Here is how it works, a standard defined contribution plan (401k, profit sharing, SEP, etc.) allows you to put money away, not be taxed on it now, and then have something, besides the government, to fall back on in retirement.
My understanding is that Social Security was created for those in poverty and unable to care for themselves. Unfortunately, Social Security has gradually become the primary retirement program for most people in this country a great idea except that it is running out of money.
- Protesters from across U.S. arrested at Utah...
- Z'Tejas closing after 13 years at The Gateway
- Dave Ramsey says: Don't leave an estate with...
- Balancing act: Survey says lack of balance,...
- Parks visitors spent $596M in Utah last year
- New solar energy project at Utah Olympic Oval...
- Company plans to hire up to 1,000 new...
- $1.8B project to take Salt Lake City...
- Protesters from across U.S. arrested at... 9
- Obama gives protection to gay,... 6
- New solar energy project at Utah... 6
- Future of Draper Park School building... 4
- Balancing act: Survey says lack of... 4
- Parks visitors spent $596M in Utah last... 3
- Beef pollutes more than pork, poultry,... 2
- Airlines scrap Israel flights over... 2