Author: Leon Clinton

After reaching age 50, you can make additional “catch-up” contributions to certain types of tax-advantaged retirement accounts. For the 2021 tax year, this opportunity is available if you’ll be age 50 or older on Friday, December 31, 2021.

Specifically, with an employer-sponsored 401(k), 403(b), 457, or SIMPLE plan, you can make extra salary-reduction catch-up contributions to your account—assuming the plan allows catch-up contributions. 

If you are self-employed and have set up a 401(k) plan or SIMPLE IRA for yourself, you can also make extra catch-up contributions to your account.  

Finally, you can make extra catch-up contributions to a traditional or Roth IRA. 

These catch-up contributions can carry a hefty punch because they are above and beyond the “regular” annual contribution limits that otherwise apply. 

The following table shows maximum allowable catch-up contributions for the 2021 tax year: 

If you’re married and both you and your spouse are age 50 or older, the amounts shown above can potentially be doubled, assuming both spouses have accounts set up in your respective names. 

But with an employer-sponsored plan, maximum salary-reduction catch-up contributions to your account might be less than the indicated amounts—depending on employee participation levels and the terms of the plan. 

The Question: How Much Are Catch-Up Contributions Worth?

This is where it gets interesting. While some folks eagerly embrace any chance to contribute more money to tax-advantaged retirement accounts, others might need some encouragement. Those in the latter category may dismiss catch-up contributions as inconsequential unless proven otherwise. Fair enough. So let’s prove otherwise.

Proof: Make 401(k), 403(b), or 457 Plan Catch-Up Contributions 

Assume you turn 50 during 2021 and contribute an extra $6,500 to your account for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your 401(k), 403(b), or 457 account (rounded to the nearest $1,000), assuming the annual rates of return indicated below:

These are substantial amounts. Of course, we are talking before-tax numbers here.  

Proof: Make SIMPLE Plan Catch-Up Contributions 

Say you turn 50 during 2021 and contribute an extra $3,000 for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your SIMPLE plan account (rounded to the nearest $1,000), assuming the annual rates of return indicated below:

Not bad! Once again, remember that these are before-tax numbers.  

Proof: Make IRA Catch-Up Contributions 

Say you turn 50 during 2021 and contribute an extra $1,000 for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your IRA (rounded off to the nearest $1,000), assuming the annual rates of return indicated below:

These are before-tax numbers for traditional IRAs but after-tax numbers for Roth IRAs.

If you would like to discuss your retirement plans, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 18, 2021

Say goodbye to the employee retention credit (ERC) for the fourth quarter. Lawmakers giveth, and lawmakers taketh away.

In this case, what lawmakers did is pitiful. It’s like magic: now you see it, now you don’t.

On March 11, 2021, the American Rescue Plan Act of 2021 became Public Law 117-2. This new law extended the ERC to the third and fourth quarters of 2021.

On November 15, 2021, the Infrastructure Investment and Jobs Act became Public Law 117-58 and ended the ERC three months early, retroactive to September 30, 2021.

Lawmakers did not kill the fourth-quarter 2021 ERC for start-up businesses. That tax benefit survived. Thank goodness!

Still, you cannot consider any retroactive repeal of a tax law to be good tax policy. And this retroactive repeal was done only nine months after passage. It is disgraceful.

But don’t let this bad news deter you from claiming the credit for 2020 and for the first three quarters of 2021. You may remember that the remaining credits can add up to $26,000 per employee.

And keep in mind that there’s no mad rush—you have time. You can claim the ERC anytime during the three-year statute of limitations.

If you need my help getting your ERC, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 14, 2021

Real estate values have surged in many parts of the country and are still surging in some areas. That’s good news if you’ve been holding raw land for investment. 

You might be ready to cash in by subdividing and developing your acreage and selling off parcels for big profits. Great, but what about taxes? 

Good question, because there’s a big issue to consider.   

The Tax Issue

When you subdivide, develop, and sell land, you’re generally deemed for federal income tax purposes to be acting as a dealer in real property who is selling off inventory (developed parcels held for sale to customers).

That’s not good, because when you’re classified as a dealer for tax purposes, all of your profit from land sales—including the part attributable to pre-development appreciation in the value of the land—is considered ordinary income. So, it’s taxed at your regular federal rate, which (for now) can be up to 37 percent. 

You may also get hit with the 3.8 percent net investment income tax (NIIT), which (for now) can push the effective federal rate up to as high as 40.8 percent (37 percent + 3.8 percent). Ugh! 

Seeking a Better Tax Result

It sure would be nice if you could pay lower long-term capital gains rates on at least part of your land sale profits. 

For now, the maximum federal rate on long-term capital gains is 20 percent. With the 3.8 percent NIIT added on, the maximum effective rate (for now) is “only” 23.8 percent (20 percent + 3.8 percent). That’s a lot better than 40.8 percent.

Fortunately, there’s a way to qualify for favorable long-term capital gain treatment for the pre-development land appreciation, assuming you really and truly have held the land for investment. 

In other words, this assumes you’re not already classified as a real property dealer. 

But profits attributable to the later subdividing, development, and marketing activities will be considered ordinary income collected in your capacity as a real property dealer. Oh well. 

Since pre-development appreciation is often the biggest part of the total profit, you should be overjoyed to pay “only” 20 percent or 23.8 percent on that piece of the action. The rest of this article explains a way to achieve this tax-saving goal.  

Form an S Corporation to Function as a Developer Entity 

Say you form a new S corporation. 

Then you sell your appreciated raw land to the S corporation for its pre-development fair market value (FMV). Great idea! As long as you’ve 

• held the land for investment rather than as inventory as a real property dealer, and 
• held it for more than one year, 

then the sale to the S corporation will qualify for lower-taxed long-term capital gain treatment. 

So, for now, you’ll lose (at most) “only” 23.8 percent of your whopping long-term gain to the feds. 

After buying the land from you, the S corporation then subdivides and develops the property, markets it, and sells it off. The profits from these activities are ordinary income that’s passed through to you and taxed at your personal rates. 

But this is a great tax-saving deal when the land is highly appreciated to start with.  

To sum up, the S corporation developer entity strategy allows you to lock in favorable long-term capital gain treatment for the pre-development appreciation of the land while paying higher ordinary income rates only on the additional profits from development and related activities. Good strategy.  

If you would like to discuss how to put this strategy to work for you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 10, 2021