If you are reading this article, then consider this as your first step in your last-minute tax saving strategy. Most of you may be familiar with the fact that you can still make contributions to your Individual Retirement Account (IRA) now and take a deduction on your 2009 tax return. For example, you can still contribute $5,000 to your IRA account and as long as you designate that to be 2009 contributions, you may be able to save $1,250 in taxes on April 15th assuming you are in the 25% tax bracket. The benefit of this strategy is that in addition to saving $1,250 in taxes (versus paying it to the IRS); you now also have an additional $5,000 in your retirement account that can invest tax free until distribution time in the future.
Now let’s take this concept to another level and talk about the SEP. The SEP, also known as Simplified Employee Pension plan, is what I like to refer to as an IRA on steroids. It has both the current tax savings and the tax deferral benefits of the IRA except it is exponentially more powerful. With a SEP, the employer can contribute up to $49,000, or 25% of the employee’s salary, on behalf of an employee per year. Accordingly, the SEP plan is a great alternative to an IRA for a self-employed person or a small business owner. The best part of the SEP is that you have until the extended due date of the tax return to set-up and fund the SEP and still be able to take a deduction for the 2009 year. Here is an example of how this works: Tyler, who owns a sign company, just realized that he is looking at paying a hefty tax bill to the IRS because of all the money he made in his business in 2009. This is the first time he is in the 35% tax bracket and he really wants to decrease his tax bill. Tyler meets with his tax advisor and determines that he can set up a SEP plan in his business. Before Tyler files his 2009 tax return on October 15, 2010, his sign business makes a contribution of $49,000 on his behalf into the SEP. Tyler’s business then takes a $49,000 corresponding deduction and results in $17,150 of tax savings for 2009. Here are the benefits that were achieved in this strategy: 1) Tyler was able to save $17,150 immediately that would otherwise be lost to taxes, 2) Tyler was able to potentially decrease his overall taxes if the SEP contribution deduction lowered him to another income tax bracket, and 3) Tyler now has $49,000 in his SEP account that can invest in tax efficient assets because he pays no taxes on income or gain from those investments until he withdraws them at retirement.
A SEP is easy to set-up, cost efficient to maintain, and can be utilized to invest in both traditional and alternative assets. As you can see, the SEP is a powerful tax and retirement planning tool that can still be implemented to save tax dollars for the 2009 year. So what are you waiting for? Speak to a qualified tax advisor to start saving some significant taxes and take control of your wealth building!
Copyright © 2010 by Amanda Y. Han, CPA
KEYSTONE CPA, INC.
Maximizing Profits & Increasing Wealth
http://www.keystonecpa.com
*We welcome suggestions for future topics that you would like to hear about tax saving strategies relating to real estate investing. So please email your suggestions to me directly at ahan@keystonecpa.com .
Amanda Han is a Managing Director at Keystone CPA, Inc., a firm specializing in tax mitigation strategies for business owerns and real estate investors. For complimentary top-notch tax mitigatin strategies, visit http://www.keystonecpa.com and sign up for the Monthly Newsletter and Member’s Library.
