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How To Your Reduce AGI By $49,500

  Sanjiv Gupta CPA  Published 
How To Your Reduce AGI By $49,500

Tax differed Retirement savings plans are huge tax shelters for individuals and small business owners.  You may find it quite obvious nonetheless it is often overlooked.  If you are looking into lowering your 2011 tax bill than here are a couple of options to consider.

  1. Profit-Sharing Contribution into 401(k) plan:  Maximum Annual contribution limit for 2011 in the 401(k) plan is $49,500.  However, as you may already know, the maximum amount an individual can contribute to their 401(k) plan is $16,500.  Then what is a maximum of $49,500?  This is an additional contribution that can be made on your behalf by your company into your 401(k) plan.  For example, you contribute $16,500 and your employer may match 100% of what you contribute making the total 401(k) contribution of $33,000.  For small business owners, this is a great tax shelter because they can contribute a maximum of $49,500 by using an individual $16,500 limit and matching $33,000 as profit share or bonus.    This will directly reduce your AGI by $49,500.  How is that for a tax discount?  Moreover, a business can also deduct the additional contribution made to employee 401(k) as a business expense and reduce its own business tax liability. I would also like you to note that the deadline for C-Corp and S-Corp tax filing has already passed.  Making any contributions to your employees 401(k) plan for the year 2011 will require you to file an amended tax return.
  2.  What to do if you don’t have 401(k)?  You can contribute up to $5000 in IRA.  For individuals with no 401(k), IRA is the best option.  You can contribute up to $5000 in IRA or $6000 if you are age 50 or older. Setting up an IRA is also very easy.  You can simply contact any online brokerage to open up a new IRA account.

I found a couple of very good examples of 401(k) plan options on the IRS Website.

There are separate, smaller limits for SIMPLE 401(k) plans.

Example 1: Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2011, $16,500. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $16,500. He has enough earned income from his business to contribute the overall maximum for the year, $49,000. Greg can make a nonelective contribution of $49,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals under his employer’s plan because the limit on annual additions applies to each plan separately.

Example 2:  In Example 1, if Greg were 52 years old and eligible to make catch-up contributions, he could contribute an additional $5,500 of elective deferrals for 2011. His catch-up contribution could be split between the plans in any proportion he chooses. His maximum nonelective contribution to his solo 401(k) plan would remain $49,000 even if he contributed the full $5,500 catch-up contribution to this plan.

In addition, the amount of compensation that can be taken into account when determining employer and employee contributions is limited. In 2011, this limit is $245,000; it’s $250,000 in 2012.

 Want one more reason to consider setting up  401(k)  for your company?

You can get up to $1500 in tax credit over the next three years ($500 credit each year for 3 years) for setting up a new 401(k) plan.  This tax credit is offered to offset set up and administrative expenses into the plan.   Your business must have less than 100 employees to take advantage of this plan.