Illinois residents Mary and Joseph have two children: Josh, age 10, and Jennifer, age 12. The parents set up 529 plans through the State of Illinois and contributed $5,000 for Jennifer and $3,000 for Josh. Their `ho ho ho’ is $400 in state taxes they did not have to pay to Illinois. Bill’s mom and Mary’s single sister, Hanna, wanted to do something for the children, as well, and so they added $3,000 to each of the children’s plans. They saved $150 each in Illinois state taxes.
Bill runs a small, profitable family business. As a corporation, he is in the 35 percent federal tax bracket, and he also pays the Illinois corporate rate of 9.5 percent.
Bill takes advantage of a provision that allows him an immediate deduction of up to $500,000 for qualified costs in 2011, which can include a vehicle, computer, desk, chairs or other equipment. Normally he would have to spread this deduction over a period of years as depreciation. Bill’s `ho ho ho’ is $277,500 in business tax savings this year.
Mary’s smart and successful sister Hanna runs a small S Corporation, selling cupcakes through Whole Foods. This has been a banner year, especially for the red velvet cakes. She will net $225,000 this year. In the past, she’s had a small 401(k) retirement plan for her employees, but she feels frustrated as she is getting older (45) and has saved little for her own retirement and now qualifies for the top tax bracket.
She visits her financial advisor and complains about her 401k plan. Due to the regulations of these plans, she can only contribute $6,000 for herself and $2,800 for each of her employees. She is frustrated in her efforts to lower her current tax bill and to save for retirement. Her advisor sets up a custom retirement plan designed just for her business. Hanna can now contribute $100,000 for herself and continue to contribute $2,800 for her young employees. Hanna will be able to defer over $40,000 in taxes this year. She figures she will be in a lower tax bracket when she retires, so she will probably never have to pay all those deferred taxes. She now feels in the `ho ho ho’ mood.
The whole family feels happy. Bill decides to celebrate and take the family on a trip to Hawaii for the holidays. Bill will use the tax-free air miles he earned from his tax deductable business trips.
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