What to do when you don't owe any taxes

[Justin234]

Hi Forum,

I just did my taxes for 2013, having finally balanced out all my expenses and revenues for the small business I run with my wife. I was anxious to find my total income (after business expenses) so that I could figure out how much "employer contribution" I could pay into my and my wife's Solo 401ks.

But I discovered, to my surprise, that I didn't owe any personal tax (this is not counting the business Self-Employment tax), and I realize that I didn't quite prepare for that scenario. My total SE tax was $6000; minus the child tax credit (I have 3 kids) brings me down to $3000, of which I've paid half, so I still owe $1500 and there doesn't seem any way out of that.

My main question is: Am I correct that there is no point in adding anything else to my 401K from my business? I could put in about $6000 more before April 15, but it seems to me that if it doesn't lower my tax rate, I might as well put the money straight into my 2014 401K, or taxable account (the $6000 would not lower my SE tax - they don't seem to let you count that as an expense).

A secondary question is: How do you predict when you might not have to pay any taxes, and if you can do that, should you stop contributing to your 401k at that point?

I'm new to saving money (and making it for that matter) so please let me know if I'm missing anything obvious here.

Below are the numbers if anyone is interested (numbers are rounded):

Income   
W-2 Salary                $35,000.00 (quit this job mid-year)
Business Income    $41,000.00
Dividends                         $100.00
TOTAL INCOME            $76,100.00

Deductions   
401K                   -$34,000.00 (for both wife and me)
SIMPLE IRA             -$1,000.00 (from my job)
Health Insurance        -$100.00
1/2 SE Tax             -$3,000.00
ADJ. GROSS INC        $38,000.00
   
Deductions and Exemptions   
Stand. Deduction     -$12,200.00 (Married filing jointly*** Corrected based on comment below)
Exemption           -$19,500.00 (5 of us)
Taxable income      $6,300.00
Tax Owed                         $700.00
   
Foreign tax paid          -$19.00
Childcare Credit        -$560.00
Retir. Savings Credit     -$121.00
Total Tax Owed            $00.00   
   
Self Empolyment Tax   
SE Tax                      $6,000.00
Child Tax Credit     -$3,000.00
TOT OWED                   $3,000.00
Already Paid             -$1,500.00
   
Now Owe                      $1,500.00

(sorry about the formatting - not sure how to get columns to line up)

[foobar]

Wouldn't a company contribution to the 401(k) reduce the amount of SS that needs to be paid because as far I know you don't pay employment taxes on them?

There is always a point in putting money into a 401(k). It is use it or lose it benefit. Now if you not close to the max (51k or so), this might not be a big deal. Tax deferal has a ton of advantages (and a few disadvantages) when you start holding things like bonds and reits.  And if your in the 0% tax stage, you should be doing a ROTH 401(k) for some of the money.

The other thing to think about is selling stock to take advantage of those 0% capital gains rates. Obviously wash sales rules and the like apply.

Hi Forum,

I just did my taxes for 2013, having finally balanced out all my expenses and revenues for the small business I run with my wife. I was anxious to find my total income (after business expenses) so that I could figure out how much "employer contribution" I could pay into my and my wife's Solo 401ks.

But I discovered, to my surprise, that I didn't owe any personal tax (this is not counting the business Self-Employment tax), and I realize that I didn't quite prepare for that scenario. My total SE tax was $6000; minus the child tax credit (I have 3 kids) brings me down to $3000, of which I've paid half, so I still owe $1500 and there doesn't seem any way out of that.

My main question is: Am I correct that there is no point in adding anything else to my 401K from my business? I could put in about $6000 more before April 15, but it seems to me that if it doesn't lower my tax rate, I might as well put the money straight into my 2014 401K, or taxable account (the $6000 would not lower my SE tax - they don't seem to let you count that as an expense).

A secondary question is: How do you predict when you might not have to pay any taxes, and if you can do that, should you stop contributing to your 401k at that point?

I'm new to saving money (and making it for that matter) so please let me know if I'm missing anything obvious here.

Below are the numbers if anyone is interested (numbers are rounded):

Income   
W-2 Salary                $35,000.00 (quit this job mid-year)
Business Income    $41,000.00
Dividends                         $100.00
TOTAL INCOME            $76,100.00

Deductions   
401K                   -$34,000.00 (for both wife and me)
SIMPLE IRA             -$1,000.00 (from my job)
Health Insurance        -$100.00
1/2 SE Tax             -$3,000.00
ADJ. GROSS INC        $38,000.00
   
Deductions and Exemptions   
Stand. Deduction     -$12,200.00 (head of household)
Exemption           -$19,500.00 (5 of us)
Taxable income      $6,300.00
Tax Owed                         $700.00
   
Foreign tax paid          -$19.00
Childcare Credit        -$560.00
Retir. Savings Credit     -$121.00
Total Tax Owed            $00.00   
   
Self Empolyment Tax   
SE Tax                      $6,000.00
Child Tax Credit     -$3,000.00
TOT OWED                   $3,000.00
Already Paid             -$1,500.00
   
Now Owe                      $1,500.00

(sorry about the formatting - not sure how to get columns to line up)

[iamlindoro]

Wouldn't a company contribution to the 401(k) reduce the amount of SS that needs to be paid because as far I know you don't pay employment taxes on them?

For an S-Corp, the company contribution is a business expense (and reduces SE taxes).  If he's a sole proprietorship, he owes the SE tax on the full amount (and the combined employer-employee contribution goes on line 28 of the 1040, reducing only personal income tax).

Reminder to self, investigate S-Corp this year :)

[Bruno]

A secondary question is: How do you predict when you might not have to pay any taxes, and if you can do that, should you stop contributing to your 401k at that point?

We do the math and stop the pre-tax contributions, and rather put the money into our Roths - i.e. zero tax now and zero tax later.
Not sure why you couldn't do that, you have earned income in 2013.

[Gin1984]

I'm trying to figure out why you put head of household and not married.

[Justin234]

I'm trying to figure out why you put head of household and not married.

Oops, that was a mistake - if fixed it on the post and made a note. Not sure what I was thinking, but we are married filing jointly. Thanks.

[Justin234]

Wouldn't a company contribution to the 401(k) reduce the amount of SS that needs to be paid because as far I know you don't pay employment taxes on them?

For an S-Corp, the company contribution is a business expense (and reduces SE taxes).  If he's a sole proprietorship, he owes the SE tax on the full amount (and the combined employer-employee contribution goes on line 28 of the 1040, reducing only personal income tax).

Reminder to self, investigate S-Corp this year :)

You might also want to look into setting up an LLC and electing S-Corp status.  You get the easier LLC administration requirements, plus the better tax preferences of an S-Corp.  I haven't done this personally (I have a regular S-Corp) so I don't know all the details firsthand, but it is definitely something to look into.  I bookmarked the below link quite a while back when I was thinking about starting up another company.  Should be a good starting point for you:

http://www.bizfilings.com/toolkit/news/tax-info/llc-plus-scorp-equal-best-of-both.aspx

Thanks for the info re: corps. I also have this on the to do list for 2014 but need to make sure about all the costs and benefits before jumping in.

[Justin234]

A secondary question is: How do you predict when you might not have to pay any taxes, and if you can do that, should you stop contributing to your 401k at that point?

We do the math and stop the pre-tax contributions, and rather put the money into our Roths - i.e. zero tax now and zero tax later.
Not sure why you couldn't do that, you have earned income in 2013.

Just to clarify, you are referring to 401ks in both cases, right? So you contribute to a trad 401k, and then switch over to Roth 401k?

That does make a lot of sense, but my original plan has been to max out the 401k during the first few months of the year (before I really know the details of what taxes are going to look like). I guess from what you are saying I can do the calculations along the way - I'll have to do some thinking about how to do the math and anticipate what I'll owe, given that I won't know the final revenue, expenses, and net profit... I'll also have to set up a solo Roth 401K, which I hadn't expected to need.

[Bruno]

A secondary question is: How do you predict when you might not have to pay any taxes, and if you can do that, should you stop contributing to your 401k at that point?

We do the math and stop the pre-tax contributions, and rather put the money into our Roths - i.e. zero tax now and zero tax later.
Not sure why you couldn't do that, you have earned income in 2013.

Just to clarify, you are referring to 401ks in both cases, right? So you contribute to a trad 401k, and then switch over to Roth 401k?

That does make a lot of sense, but my original plan has been to max out the 401k during the first few months of the year (before I really know the details of what taxes are going to look like). I guess from what you are saying I can do the calculations along the way - I'll have to do some thinking about how to do the math and anticipate what I'll owe, given that I won't know the final revenue, expenses, and net profit... I'll also have to set up a solo Roth 401K, which I hadn't expected to need.

Yes, any retirement account that you elected the 'Roth' version and you can contribute from your business. It will make sense because of your 0% personal income tax. Whatever you contribute to a Roth will count as personal income, however if you hit more than 0% personal tax you can claim the Savers credit which would be another $400 tax credit if you go over $38,500 AGI.
I am not sure if you can still do an employer contribution for 2013 - your task to figure that out.