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How High-Income Professionals Can Benefit from the Pass-through Deduction

Article Highlights:

  • High-Income Professionals 
  • Specified Service Trade or Business 
  • Sec. 199A Deduction 
  • Defined Contribution Retirement Plans 
  • Defined Benefit Retirement Plans 
  • Tax Savings 
If you are a high-income professional who is excluded from the new pass-through deduction because you are in a specified service trade or business (SSTB), you may be able to use retirement plan contributions as a work-around so that you can benefit from that new 20% deduction.

An SSTB generally includes the following trades or businesses:
  • Health (services by physicians, nurses, dentists, veterinarians, and other similar health care providers, although this does not apply to spas and health clubs); 
  • Law; 
  • Accounting; 
  • Actuarial science; 
  • Performing arts (but this does not apply to the services of others in the industry, such as promoters and broadcasters); 
  • Consulting; 
  • Athletics; and 
  • Financial services. 
The new deduction includes limits based upon an individual’s taxable income. For individuals in SSTBs, these limitations do not kick in as long the taxpayer’s taxable income is below the phase-out threshold. For SSTBs, the deduction phases out if your taxable income is between $315,000 and $415,000 for married couples filing jointly and between $157,500 and $207,500 for other filing statuses. Thus, once your taxable income is more than the $415,000 or $207,500 level, there is no 199A deduction based on income from the SSTB.

One way to reduce taxable income is by contributing to deductible retirement plans. But IRAs won’t cut it because they can only shelter $5,500 ($6,500 for those age 50 or older), plus their deductibility is phased out for higher-income taxpayers.

Better choices include defined contribution plans such as a self-employed retirement plan or a simplified employee plan (SEP), which allows a deductible contribution of 25% of your business’s net profit, but capped at $55,000 (2018). These may help for some, but you may need to contribute a lot more to get below the deduction phase-out threshold.

Another alternative is a defined benefit plan, which provides for a fixed benefit at retirement. The contribution amounts are calculated to meet that benefit goal based on the participant’s age and the annual retirement benefit desired. The maximum annual benefit for an individual beginning retirement at age 65 is $220,000. Thus, depending upon the selected benefit and the individual’s age, the annual deductible contribution could be six figures and would provide a substantial reduction in taxable income that could help you qualify for the 20% pass-through deduction. However, defined benefit plans cost a substantial amount to establish and maintain, which needs to be considered.

There are also other tax benefits. For instance, any reduction in taxable income also reduces your income tax liability, and those using this strategy are in the 32% or higher tax bracket, so any reduction in taxable income will generally save 32% of the amount contributed to the retirement plan, in addition to whatever benefit is gained from the 20% pass-through deduction.

As you can see, this is a complicated strategy, and there is a lot to be considered, but the benefits can be substantial. Please call for an appointment to determine in greater detail the types of retirement plans available to you and how this strategy will impact your tax liability.

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Offices in Flemington, NJ and Califon, NJ

Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.

Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.

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Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.

Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.

We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.

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