I'm using the CSS 2020 spreadsheet to explore scenarios for a family with 3 kids, MFJ to have wages or self-employment that targets the threshold at which income is most tax efficient. If I'm interpreting the CSS correctly, a family could have around $25K in wages where everything below that has a negative marginal rate. The family could have around $15k in net Sch C income with a negative marginal rate (with income above $15k, up to about $26K) at only a .20% marginal rate.
Using those thresholds as baselines incomes to "target", I also wanted to explore strategies for reducing tax in the event where the target income was "overshot". For example, the family wants to target $24K in wages, but makes $36k. Or targets $24k in SE income, but makes $36k.
Using those examples above.... if I'm using and interpreting the CSS correctly (which may be a big IF), it seems easy enough, with $36K in wages to use an employer-based 401(k) to contribute $12K and maintain a negative marginal rate up to the $36K earned. Before running the CSS, I assumed that contributing $12K to a tIRA would have the same effect, but it doesn't. It does effect the marginal rate, but only for higher income than $36k. Can anyone explain this to me in laymen's terms?
When I did the same exercise with $36K in net Sch C income, it seemed to indicate that both tIRA deductions or SE deductions of $12K would have the same effect. That is, they effect the marginal rate, but only at incomes over $36K. They don't seem to expand the space for income with negative marginal rates.
Is there any certain way Sch C earnings and/or SE deductions can be structured to behave like employer-based 401(k) contributions, for this purpose? We already have a Sole Propietorship and each of us has a Solo 401(k) through it, that we have used on/off for side income over the years.
Even having to overcome the extra expense of self-employment taxes, implementing a strategy like this is probably going to be easier for us with self-employment contract work instead of wages.