Richard Wagner: Business owners, what you keep matters more than what you earn

By Richard Wagner

For the Deseret News

Published: Wednesday, Dec. 12 2012 12:15 p.m. MST

So, in the spirit of self-sufficiency, here is how we take care of ourselves. Spend less than we earn and use tax savings to help save for retirement. If you have a defined contribution plan, you are able to set aside up to $17,000 of your salary as a deferral, meaning you don’t have to pay tax on it now. If you are 50 or older you can potentially defer up to $22,500 in salary and not pay tax on it now. In addition, if your company chooses to, they can contribute an additional $33,000 to the plan for your benefit and get a tax deduction for the entire amount. That is a total of up to $55,500 tax deduction, socked away for your future retirement. What a great deal!

You have probably been paying into Social Security for years, if not decades. Can you imagine the value of all the Social Security payments you have made over your working lifetime, compounded with earnings? Why don’t we have a Social Security surplus? Well, if the government can’t manage Social Security as well as we would like, at least you can still manage your own retirement with a boost from tax savings.

Let’s look at an example — assume you put $55,500 into your retirement account and you are in that 35 percent federal bracket and 5 percent state bracket for a total of 40 percent of your taxable income going to the government. If you apply your combined 40 percent tax rate to the $55,500 going into your plan, your tax savings would be $22,200 per year. Can you think of an easier way to save more than $20,000 per year out of your budget?

Many times new clients will say, “Yeah, that’s a great idea saving taxes and all, but where do I come up with the money?” As Wimpy said to Popeye, “I’ll gladly pay you Tuesday for a hamburger today.” The same thing partially works with pension plans. You can potentially deduct the $33,000 company contribution in 2012, but you don’t have to actually put it into the plan until the earlier of Sept. 15, 2013, or the date you file your 2012 tax return, including extensions. You get the deduction now, but don’t have to put the company portion of the cash in until later.

Furthermore, if you are saving $22,200 in taxes, you can reduce your estimated tax payments and withholdings by this amount, which helps you fund your plan. Take the tax deductions this year, but wait until next year to fund the company portion of your plan.

Running out of excuses? I had a new client ask me, “Could I have been getting all these tax deductions for the past 10 years?” My answer — Yes. The next question was, “If I had been doing this for each of the past 10 years, how much would I have saved in taxes?” The answer is startling and quite large.

If you assume a 40 percent combined federal and state rate, we’re talking about $22,200 per year tax savings times 10 years, which equals $220,000 in total tax savings. That figure excludes growth and compounding of interest. Not enough? Well, next week, I’ll show you another strategy capable of producing four times the deductions or more.

This is not an offer or solicitation of any offer to buy or sell any security, investment or other product. Such an offer may only be made after a suitability review has been performed and with related offering documents. Examples shown, including different percentages and tax brackets, are provided for illustration purposes only and may not be representative of your specific tax situation.

Tax data can be sourced at www.irs.gov. Advisory services are offered through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment adviser that is a member of FINRA/SIPC. www.vwapro.com.

Rich Wagner, CPA, MAcc, is a tax reduction and investment expert. If you’d like more ideas on protecting, saving and growing your money, call him at 801-657-4459, or email richw@vwapro.com

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