$2,400 401k Deduction Limit – Why Bother!

We have discuss previously that Congress may tweak deductible 401(k) contribution limits with Tax Reform. One proposal was to eliminate the deduction and convert all 401(k) contributions by employees to be like a Roth IRA.  There would be no deduction, but all income earned on the account would not be subject to income tax when the amounts were finally distributed.

Late last week, a new rumor came out with a cap of $2,400 on 401(k) contribution deductions.  For 2018, the current allowed deduction is $18,500 with an additional $6,000 for those 50 and over.  As expected, Wall Street does not like this and a lot of push back arose over the weekend and now President Trump has tweeted out that there will be NO changes to 401k limits.

However, if they are able to reduce the corporate rate to 20% and the flow-through rate to 25%, there will need to be offsets to help pay for this and it could be costly to what farmers may be able to deduct going forward in regards to a 401k plan.

So far, most of the tax reform proposals that I have seen appear to be at best a wash for most farmers.  In certain situations, you will see a reduction in your income tax, but in many other situations you will see a small to large increase in your income taxes if the following happens:

  • Subjecting all pass-through income (including self-rental) to 70% taxed at the highest rate and subject to self-employment/payroll taxes and only 30% being allowed at lower rates.
  • Capping business interest deductions for corporate taxpayers.
  • Eliminating full step-up in basis on inherited assets.
  • Eliminating Section 1031 exchanges for land (100% bonus depreciation would allow it for new farm equipment and new farm buildings).
  • Capping 401(k) contribution deductions at $2,400.
  • Eliminating the deduction for:
    • State income taxes
    • State sales taxes
    • Personal property taxes
    • Medical deductions
    • All miscellaneous itemized deductions
    • Gambling losses
    • Personal casualty losses
  • Eliminating the personal exemption (for a family of four this is a permanent annual loss of a deduction over $20,000).
  • Providing a “fourth” tax rate that could even be higher than the current 39.6% rate.
  • Eliminating the 10% tax bracket.
  • Eliminating the DPAD deductions (ask our dairy farmers how much that will hurt).
  • Possibly tweaking the cash method of accounting rules for farmers.

Yes, we know that having unlimited 100% bonus depreciation for at least 5 years will help farmers, but that means you still have to spend money to save taxes.  The reduction of tax brackets from seven to likely 4 does nothing to saving on taxes and in many cases it will increase your tax burden if you fall in the wrong income range.

We will keep you posted.

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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