Earlier this year, the Biden Administration announced a myriad of new tax proposals, which if passed, the Made in America tax plan would make numerous changes to the tax code, including but not limited to:
- Increasing the corporate tax rate from 21% to 28%
- Implementing a 15% minimum tax on “book income” of large companies that have little taxable income but high profits
- Ramping up enforcement of corporate tax avoidance
- Raising the top-tier income tax rate from 37% to 39.6%
Consequently, if you think your tax rate could go up under Biden’s plan, you’ll want to speak with a CPA to learn more about the strategies you can use to reduce your taxable income.
Enter retirement planning
Retirement plans not only allow you to invest money now for when you retire, they also come with significant tax advantages. For example, if you establish a traditional IRA, you can fund it with pre-tax dollars, which helps reduce your taxable income during the current tax year. Income taxes aren’t paid until withdrawals are made. Traditional IRAs are often best for workers who think they’ll be in a lower tax bracket when they retire, then they are today. According to the IRS, the limit contributions for traditional IRAs in the 2021 tax year was $6,000 (or $7,000 if you’re age 50 or older).
A SEP-IRA, on the other hand, is specifically designed for small business owners, their employees, and self-employed workers. Similar to a traditional IRA, SEP-IRA contributions are funded with pre-tax dollars, and contributing to it can help reduce your taxable income. SEP IRAs tend to be the best choice for self-employed workers (and small business owners) who are looking for ways to maximize their contributions to their retirement plan (and thus, reduce their taxable income). According to the IRS, SEP-IRA contribution limits are higher than the limit that’s been set for a traditional IRA. Employer contributions cannot exceed the lesser of the following:
- 25% of an employee’s compensation, or
- $58,000 for 2021
If you’re concerned about the potential ramifications of a new tax plan and you’d like to learn more about the strategies you can use to reduce your taxable income, we can help. Call our office today to schedule a no-cost consultation with a licensed CPA.