It’s tax time again. That means you need some important last minute tax-saving strategies. With April 18 being tax day, you do have a few extra days to file this year but it’s time to get this done. If you already have a Solo 401k, now is when you reap the many tax advantages that come with being self-employed. If you are not self-employed, you could very well be limited to the standard tax deduction of $12,550 that applies to both individuals and married couples in 2021.
Being self-employed does not have to be your only job or a full-time job. Being self-employed only part-time comes with the same tremendous tax advantages. When you are self-employed, you first write off all your business expenses, deductions, AND then take the standard deduction of $12,550. Taking all of your allowable tax savings is important for everyone but the self-employed especially should be aware of tax-saving strategies for high income earners.
Deduct Up To $64,500 with a Solo 401k
Being self-employed can be much better at tax time when the largest retirement contribution available is tax-deductible through a Solo 401k.
Contribution limits to a Solo 401k are extremely high. For 2021, the max is $58,000 or $64,500 if you are 50 years old or older. This is up from $57,000 and $63,500 in 2020. This limit is per participant. If your spouse is earning money from your small business that means they can also contribute up to the same amount to the Solo 401k. If you are both 50 years old or older, this means the combined contributions could be up to $129,000 per year!
One of the best last minute tax-saving strategies you need to know about before filing your 2021 taxes is that there is still time to claim the generous Solo 401k deduction on your 2021 taxes! You had to open a Solo 401k by December 31, 2021, but tax-deductible contributions can be made right up until the filing date and that includes extensions.
- March 15, 2022 is the Solo 401k contribution deadline for S-Corporations and partnership LLCs.
- April 18, 2022 is the federal tax filing deadline for sole proprietors, single-member LLCs, and C-corporations. It is also the Solo 401k contribution deadline for those business types.
- Are you running a little late but still need last minute tax-saving strategies? Both of those dates (March 15th and April 18th) are also the deadlines for filing for a six-month extension that also allows for extensions to the Solo 401k contribution deadlines. The respective extensions are until September 15, 2022 and October 17, 2022.
Deduct Up To $7,000 with an IRA
Even if you missed the December 31, 2021 date to open a Solo 401k, you can still open an IRA before the tax deadline to save on taxes. IRAs must be established by the tax filing deadline (without extensions) for the tax year in which your qualifying contributions will apply. For 2021 contributions it means you can open a Self-Directed IRA up until April 18, 2022. Self-directed IRAs give you much more investment flexibility than traditional IRAs that are restricted to stocks and bonds on limited opportunity exchanges. Just like a Solo 401k, self-directed IRAs can invest in alternative assets like real estate, private businesses, and crypto.
For the tax year 2021, you can contribute up to $6,000 to an IRA. If you’re age 50 or older, you can contribute an additional $1,000, for a grand total of $7,000. Qualified contributions to IRAs may be deductible up to the contribution limit or 100% of the taxpayer’s compensation, whichever is less, meaning you won’t owe taxes on the amount you put into the account. There is no longer a maximum age for making IRA contributions.
Opening an IRA is one of the best last minute tax-saving strategies but you can plan for even bigger tax advantages in the future. If you are self-employed or will become self-employed in 2022, you can rollover your IRA to a Solo 401k at any time to gain all of the tax advantages going forward that are associated with a Solo 401k.
Accelerate Capital Losses and Defer Capital Gains
A good place to look for last minute tax-saving strategies is investments that you hold outside of a Solo 401k or other retirement account. Because your Solo 401k is tax-deferred and your Roth Solo 401k is tax-free, deferring capital gains with capital losses won’t work for these accounts. But it will work with capital losses that happened in other investment accounts such as taxable brokerage accounts.
Specifically, look for trades or sales that took an accumulated loss during 2021. These can be used to more than offset capital gains because capital losses are deductible up to the amount of your capital gains – plus $3,000. This can be significant as a last minute tax-saving strategy because capital gains that are realized outside of a tax-advantaged account are taxed as high as 37% for short-term investments (365 days or less) and 20% on long-term capital gains (more than 365 days). Those tax rates apply even if you don’t withdraw funds from the brokerage account. For this reason, a long-term tax savings strategy in these accounts can be a lower turnover rate for your investments.
You don’t need to be concerned about the turnover rate in Solo 401k and self-directed IRA tax-advantaged accounts.
Charitable giving is another strategy with taxable capital gains. However, this goes with long-term strategies rather than last minute tax-saving strategies. Directly donating the investment assets instead cash prevents you from paying capital gains tax on the sale, which can result in considerable tax savings. Yet, you still get a charitable tax deduction for the fair market value of the asset that you donate.
Crypto fluctuations are especially susceptible to capital gains and losses. The cryptocurrency tax rate for federal taxes is the same as the capital gains tax rate. Deferring capital gains with capital losses is sometimes known as tax-loss harvesting. Tax-loss harvesting can be used with any asset class but crypto price volatility and fluctuations throughout the year make this particularly effective. Of course, you can hold crypto tax-free in a Roth Solo 401k or tax-deferred in both a Solo 401k or self-directed IRA so that you don’t have to deal with capital gains and loss every year.
Claim The Self-Employment Tax Deduction
This is a place where a Solo 401k shines among the last minute tax-saving strategies. Because you run your own business that sponsors your Solo 401k, you pay self-employment tax (officially known as the SECA tax or Self-Employment Contributions Act tax) instead of FICA (Federal Insurance Contributions Act for Social Security and Medicare). Be sure you claim this tax deduction along with your other last minute tax-saving strategies. You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Your self-employment tax is divided into two parts that add up to 15.3%.
12.4% goes towards Social Security. For 2021, this part of the tax applies on up to $142,800 of earnings. If you earn more than that from self-employment or if you also have a job, when the combination of your job and your business reach $142,800, the 12.4% part of the tax that pays for Social Security stops for the year.
2.9% for Medicare. The Medicare portion of the self-employment tax does not have a limit. You pay the 2.9% Medicare tax on your total earnings.
For more details see IRS Tax Topic 554: The Self-Employment Tax. Self-employment tax is first calculated on Schedule SE and then reported on your 1040 as “Other Taxes.”
The good news is that you reduce self-employment income by half of the self-employment tax before applying the tax rate. If your self-employed income is $50,000, the 15.3% self-employment tax comes to $7,650. But before calculating your income tax, you subtract out half the self-employment tax to arrive at $46,175 of taxable income (not including other deductions and credits). The $3,825 difference in this example saves you $585 in taxes.
There is more good news based on the tax bracket that you fall into. Of the self-employment tax that you do owe, 50% becomes an income deduction. A simple example is that a $1,000 self-employment tax payment reduces taxable income by $500. In the 25% tax bracket that saves you $125 in income taxes. This is an adjustment to income claimed on Form 1040. It applies whether or not you itemize deductions. Here is how it might work:
- You operate a sole proprietor photography business.
- For 2021 your net profit on Schedule C is $35,000.
- Your net earnings as calculated on Form SE would be $32,323 ($35,000 x 0.9235).
- The self-employment tax would be $4,945 ($32,323 x 0.153) and you would report that amount on Form 1040 in the “Other Taxes” section.
- Then you would report one-half of your self-employment tax, $2,473, ($4,945 X 0.50) on Form 1040 as an adjustment to income, which reduces your Adjusted Gross Income and the amount of income tax you owe.
But that is not all of the last minute tax-saving strategies available when you run a small business.
Write Off All Tax-Deductible Business Expenses as a Last Minute Tax-Saving Strategy
This one is probably the biggest among the last minute tax-saving strategies that you gain with a Solo 401k. This is the first part of being able to write off all your business expenses, deductions, AND then take the standard deduction of $12,550. Along with reducing your income taxes, writing off business expenses is a way that you can drive a nicer car for less money or combine a business trip with a vacation that you might not otherwise be able to afford.
There are countless business expenses that you can write off to lower the amount of taxes owed. Here we cover several of the most common, starting with your ability to drive a nicer car while paying much less.to own and operate the car.
Think about the fact that a nice new car makes an important impression for your business. Regardless if you use your personal car for business or your business owns the vehicle, you can deduct many of the maintenance and operating costs. In fact, you have two choices for how to do this.
- Actual expense method. The detailed record-keeping makes this method more labor intense. You must keep track of and deduct all your actual business-related expenses and deduct an amount for depreciation each year.
- Standard mileage rate method. You deduct a certain amount based on the standard mileage rate for each mile driven (56 cents per mile in 2021), plus all business-related tolls and parking fees.
There are also a ton of other expenses directly related to operating your business such as advertising, utilities, office supplies, inventory spoilage, and repairs that can be deducted as business expenses for 2021 (some of these are shared with our personal expenses that can lower your personal living costs such as a car, shared internet access, and writing off a home office).
You can also deduct capital start-up costs for a new business. This includes deducting up to $5,000 the first year you’re in business. Any remainder must be deducted in equal amounts over the next 15 years.
Your last minute tax-saving strategies should include going over all of your business expenses with a fine-tooth comb, including:
- Most small businesses can deduct 100% of the cost of equipment in a single year.
- Legal, professional, and consultant fees including books, seminars, etc. that allow you to not pay for these services.
- Business insurance premiums include fire, theft, and flood as well as liability and professional malpractice insurance. Almost any business-related insurance is deductible.
- When using business or personal credit to finance business purchases, the interest and carrying charges are fully tax-deductible.
- Real estate tax on property used for business is deductible, along with any special local assessments. Don’t forget your home office.
- Education expenses related to your current business, trade, or occupation.
- A 20% Pass-Through Tax Deduction for sole proprietorships, LLC, partnerships, or S corps. This deduction is in addition to all the other business deductions, making it well worth operating a small business.
Many business expenses get overlooked every year. A few others to look for are bank service charges, casual labor, casualty and theft losses, beverage service, and petty cash funds. For even more last minute tax-saving strategies on business expenses see our article: Self-Employment Taxes – Maximize Deductions.
Setting Up Your Self Employed Retirement Plan
Along with all the tremendous business tax write-offs that come from running your small business is the unique ability to open a Solo 401k or Roth Solo 401k. Running a small business contributes to a lifetime of wealth by paying less in taxes, living better, and saving much more towards retirement with a Solo 401k or Roth Solo 401k.
Opening your Solo 401k account with us is like hiring a mentor that saves untold amounts of time, personal energy, and money. Along with that, you get our thousands of hours of research, development, case studies, results, and experience.
