Help Client minimize tax liability - Retirement Options?

Client (husband and wife, MD residents) does not want to owe taxes for 2021 like they did for 2020 AND start putting money away for retirement. Well, the primary reason they owed taxes is because the husband did not have federal taxes withheld from is W-2 (He has his own business, a C-Corp). Their combined taxable income was $150K (AGI was $186K), federal taxes withheld was $15,800 and it should have been $21,350; they itemize and contribute to a 529 plan as well; with 2 dependents - one in grade school and one is going into their 2nd year of college.

Per their 2020 scenario, my thoughts are…

1. The wife can increase her contributions to her Employer’s 401K to max it out - $19,500 (not eligible for catch up)
2. The husband should have federal taxes withheld from his wages from his business, C-Corp.
a. Husband can also consider starting a 401K through his business, but he must keep in mind that by doing this for himself, he is subject to offer the same retirement benefit to the employees of his company. He could also pay himself a little less than he did in prior year.

3. Make IRA Contributions - $6K/each. However, phase out may apply based on their income.

Husband shared he also has a rental property (It is an LLC) and wanted to know if he could do a SEP IRA. Per my research, income from rental property is considered unearned income and thus you can not contribute to a SEP IRA. Note: His rental property is leased to his business, the C-Corp.

Is there anything else I should consider, aside from what I've mentioned?

Your insight is welcomed.

Thanks.

Looks good.

Agree with #1.

Agree that they should investigate IRA contributions. Whether that be deductible traditional, non-deductible traditional or Roth IRA. If they don't have any pre-tax IRAs and are phased out of a Roth contribution, look at a back door Roth IRA.

Investigate if the wife can make "post-tax" contributions to her employer 401(k). These are non-deductible but are not the same as Roth 401(k) employee deferrals. This strategy is also frequently called a "mega back door Roth". Not all 401(k) plans allow post-tax contributions. Wife will have to inquire and confirm.

Need earned income for a self-employed retirement plan, the rental real estate generally will not qualify. Even if it did, you'd have to deal with aggregation of the husband's other business.

If the husband's C Corp has employees that would qualify for participation, they're going to have to be included in the plan. Don't forget the aggregation rules if the husband forms another side business.

AGI doesn't seem that high. Unless they're in a low cost of living area I don't see how they're going to max out all options. Good luck.

Can't help wondering why he's a C corp these days. He's inevitably pissing away taxes he's not even counting....add'l SS taxes, corp tax, ultimate 2x corp tax.....tell me he's a foreigner.

Same question as JR1. C Corps are great for a business that pays a lot in employee benefits which seems to not be the case here.

Client can also look into setting up a defined benefit retirement plan in addition to the 401K to maximise their retirement contributions. Employees need to be included as well. The cost to set up these plans and maintain isn't cheap. However, the fees are tax deductible. Only works well for a business whose earnings stay about the same or go up every year. One of my clients had a plan like this but had a loss and couldn't make the contributions one year. We had to close the defined benefit plan.

@JR1 and @Andrew, not sure why he opted to go with a C-Corp either. Yes, he is a foreigner.

I pretty much will let him know his options and let him make his decision.

C corp was his only option, then.