Author Topic: Taxation Optimization (Self Employed)  (Read 529 times)

channant

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Taxation Optimization (Self Employed)
« on: August 17, 2018, 12:52:24 PM »
Hello MMM crew!

I posted this in "Investor Alley" but realized it would be far better suited here. So here it is:

Thanks to my recent research, including a wealth of knowledge obtained from this forum, I've been taking major steps toward FIRE over the past few weeks! Notably:

1) Opened a traditional IRA account in addition to my Roth
2) Recharacterized Roth contributions for this year and maxed out IRA to $5500 in the traditional.
3) Opened an individual 401k and contributed max $18,500
4) Paid off car loan leaving only debt to be my mortgage ($206k left at 3.5% - $1,400/month)

So now with this foundation in place, I'm looking to optimize my situation for this tax year and set a pace for the years to come. Looking for advice given the following:

1) I'm 30 years old and self employed as a sole proprietor. I have a family friend who's a CPA that does my taxes.
2) I'm estimating $75k AGI for 2018 (before contributions).
3) I have 24k sitting in a ROTH that I was funding before realizing traditional was better for my situation.
4) $5,600 in new traditional account after some growth this year.
5) $18,500 in individual 401k
6) Investments mentioned above are with Vanguard and 100% in VTSAX.
7) I have about $50k in a savings account which I'm ready to invest.
8) Goal is to be FI in 15 years (age 45)

I'm thinking the first best move would be to utilize employer contributions on the 401k which, being a sole proprietor, would be 20% of my income. I'd love some clarity on how this works from anyone else doing this as a sole proprietor or at least self employed! I'm a little confused on when during the year I should do this and how much of this can be deducted for taxes. Also, I'm assuming here that by putting enough into my 401k, that will reduce my MAGI to even allow me to use the traditional IRA with full deductions, am I correct here?

From there, are there any other tax advantaged accounts I should be taking advantage of? Maybe a SEP and/or Simple IRA? Is it silly to have that many IRAs and can I even contribute to anymore after maxing out the traditional?

Taxable account? With what's left I'm thinking of just letting some cook in here.

Anything else I'm missing?

cchrissyy

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Re: Taxation Optimization (Self Employed)
« Reply #1 on: August 17, 2018, 01:51:58 PM »
I do the SEP IRA. yes, contributing to it is in addition to the $5500 you put in a roth or traditional IRA.
The SEP limit is $55k or 25% of your self employment income that year, whatever is more. 

SeattleCPA

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Re: Taxation Optimization (Self Employed)
« Reply #2 on: August 17, 2018, 05:53:20 PM »
You probably want to fold the new Section 199A deduction into your thinking. Mad FIentist published a FI-centric blog post today about this...

Section 199A - The Tax Break of the Century

Paul der Krake

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Re: Taxation Optimization (Self Employed)
« Reply #3 on: August 18, 2018, 03:36:56 PM »
You probably want to fold the new Section 199A deduction into your thinking. Mad FIentist published a FI-centric blog post today about this...

Section 199A - The Tax Break of the Century
Nice! I've been greatly enjoying your 199A series on your blog for the last couple of months, it's given me a lot to think about.

While we've got you here, do you know how this will impact calculations for ACA subsidies in 2019 and beyond?

kpd905

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Re: Taxation Optimization (Self Employed)
« Reply #4 on: August 18, 2018, 08:19:23 PM »
By individual 401k you mean a solo 401k?  If so, you can contribute about 20% of your business profit as an employer contribution.

SeattleCPA

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Re: Taxation Optimization (Self Employed)
« Reply #5 on: August 20, 2018, 01:23:19 PM »
You probably want to fold the new Section 199A deduction into your thinking. Mad FIentist published a FI-centric blog post today about this...

Section 199A - The Tax Break of the Century
Nice! I've been greatly enjoying your 199A series on your blog for the last couple of months, it's given me a lot to think about.

While we've got you here, do you know how this will impact calculations for ACA subsidies in 2019 and beyond?

I don't think Section 199A impacts the MAGI. It doesn't impact AGI... if this is correct--and the ACA credit stuff is not an area I practice in--ACA premium credits and Section 199A deduction don't connect.