Lower taxes for 56yo with $75k 1099 earnings with no miles/business expenses

[chickenstick]

Got a tax strategy question here.

I'm helping my mother get her finances in order. She's had a really rough last few years with a super messy divorce, etc. She wasn't in charge of the finances during her marriage, nor did she work out of the home for the entire 25-year period she was married, so this is kind of the first time she's having 21st century financial habits with a 21st century job. She's a very disciplined person, an enormously hard worker, and really showing up for work in terms of implementing what we're talking about.

All that to say - her job pays quite well for someone in her position. She's 56 and makes about $75k/yr as a 1099 contract. Here's the catch though - she has no business miles, no business expenses, nothing.

Where can I look / how can I think about lowering her taxes? She's got an enormous amount of debt she's working to pay off from legal fees (tens of thousands of dollars), so I'm hesitant to recommend a strategy that would squirrel away a lot of money in an HSA or something and prevent her from paying that debt off . . . but I could be convinced that this was the right course, if the math works. I'm not really sure how to approach this. The prospect of $11,000 just going into the trash just sucks and I'd like to help her. Any ideas or thoughts are welcome.

[AMandM]

Does she have an IRA or can she open one? I believe she can put money into it this tax year (2024 contributions can be made until April 2025) to reduce her taxable income, then withdraw it next tax year (i.e. sometime in 2025) penalty-free once she turns 59-1/2.

For the future, I would consider whether she is misclassified as a contractor. It's a common tactic used by employers to get out of paying the employer's share of SS?Medicare premiums. It's illegal, but may be hard to fight/rectify.

[uniwelder]

Disclaimer-- my advice has been pretty bad recently, but I'm going to try again.  I also question whether she's classified correctly as a contractor.

Where does your mom work?  Does she go to an office or work from home?  If she works from home, she would probably have business expenses like a home office, cell phone, and computer.

[terran]

Without business expenses retirement accounts (solo 401(k) and/or IRA) are the big ones, but that doesn't help with leaving money to pay off debt.

Is there a space where she lives that she could use "regularly and exclusively" for business and something she could do every day in that space to work on the business at the beginning and end of her work day? If so she could claim a home office deduction for the space and her commute would become the walk between the rest of her house and the home office any miles she drives between the home office and a secondary work site would become deductible business mileage. Both those things would convert things she already pays for into business expenses.

Another such option would be claiming the self employed health insurance deduction if she pays for her own insurance.

I don't think not having business expenses necessarily indicates an employee vs contractor determination, but it is possible that's an issue. As I understand it that determination is mostly a matter of the amount of control the worker has over when and how they do their work.

[secondcor521]

Without business expenses retirement accounts (solo 401(k) and/or IRA) are the big ones, but that doesn't help with leaving money to pay off debt.

Is there a space where she lives that she could use "regularly and exclusively" for business and something she could do every day in that space to work on the business at the beginning and end of her work day? If so she could claim a home office deduction for the space and her commute would become the walk between the rest of her house and the home office any miles she drives between the home office and a secondary work site would become deductible business mileage. Both those things would convert things she already pays for into business expenses.

Another such option would be claiming the self employed health insurance deduction if she pays for her own insurance.

I don't think not having business expenses necessarily indicates an employee vs contractor determination, but it is possible that's an issue. As I understand it that determination is mostly a matter of the amount of control the worker has over when and how they do their work.

Emphasis added.

I personally think trying to claim commuting miles from her "home office" to a "temporary work site" is dubious.  It's also obviously miles from home to a work location, which are normally not deductible as commuting miles.  OP, if you consider doing this for your mother I would recommend caution and that you doublecheck that suggestion.

Also, if you take the home office deduction, I'd probably recommend the simplified method.  The actual expenses method or whatever it's called is harder to keep track of, especially when she goes to sell the home.

Finally, I'd emphasize the word "exclusively".  Her home office area can't have any personal use, which is usually a very high bar to meet.

[terran]

I personally think trying to claim commuting miles from her "home office" to a "temporary work site" is dubious.  It's also obviously miles from home to a work location, which are normally not deductible as commuting miles.  OP, if you consider doing this for your mother I would recommend caution and that you doublecheck that suggestion.

If she only works at one location (the employer's place of business) in addition to the home office you're probably right to be cautious and I probably should have said something to that effect. This would be especially true if the off site location is where she does most of her work. If she works at multiple other locations or spends most of her work time at the home office I think that would make a much better argument for claiming mileage between the home office and the other work location(s). 

[dandarc]

Does she have medical costs outside of premiums (which she should be deducting as someone else upthread posted)? HSA doesn't have to be an investment account - can flow money through to cover qualified expenses same year that you contribute. Save income tax on whatever expected qualified expenses might be.

What is the interest rate and repayment terms on these debts? Might be cutting nose off to spite the face by prioritizing that vs tax-advantaged accounts. Also might not - the terms of the debt matter.

There's not a lot of magic in terms of conjuring deductions without having paid expenses, and paying more expenses just to save on taxes is rarely a good move - most of the time you're sending $1 out to save $0.20 on tax. So don't really have anything to add other than make sure you're taking advantage of all deductions she does qualify for - self-employed health insurance deduction is a big one, home office if she actually qualifies.

[SeattleCPA]

If she hasn't worked, you might also want to consider the effect of her tax accounting on her social security benefits.

She's 56, maybe ten years of earnings left? Given the way the formulas work, I'd be thinking about trying to get ten years of $75K a year earnings. That's $750,000 of total earnings so the "35-year average" is roughly $21000. That would give her about $1500 a month if she waited until age 70 to begin drawing benefits.

Note: Calculators above from ChatGPT and then calculations simplified and rounded by me.

P.S. Heartily recommend Mike Piper's book about social security here. He's an expert.

[terran]

If she hasn't worked, you might also want to consider the effect of her tax accounting on her social security benefits.

This is a great point. Don't lose sight of the forest for the trees. As a counterpoint, if she was married at least 10 years and doesn't get remarried she can collect 1/2 of her ex's social security benefit, which might be more than what she'll get on her own record, which would negate this. That might be hard information to get though, but if she has a sense of her ex's earnings history to date that could give a general idea of the scale of what she might get.

[SeattleCPA]

As a counterpoint, if she was married at least 10 years and doesn't get remarried she can collect 1/2 of her ex's social security benefit, which might be more than what she'll get on her own record, which would negate this. That might be hard information to get though, but if she has a sense of her ex's earnings history to date that could give a general idea of the scale of what she might get.

+1

[chickenstick]

Thanks folks. This is all super helpful. Yes, she can definitely write off probably a third of her house (maybe more?) for business purposes as she keeps a massive amount of shelved inventory in her home. I'll need to get with her to figure out exactly what percentage. Someone else (IRL) suggested she open an LLC as an S-corp if I recall correctly and that would shave taxes quite a bit.

[dandarc]

Thanks folks. This is all super helpful. Yes, she can definitely write off probably a third of her house (maybe more?) for business purposes as she keeps a massive amount of shelved inventory in her home. I'll need to get with her to figure out exactly what percentage. Someone else (IRL) suggested she open an LLC as an S-corp if I recall correctly and that would shave taxes quite a bit.

S-corp is a double-edged sword - you save taxes by lowering your salary for FICA purposes vs. paying self-employment on almost the whole amount. But lowering salary for FICA also lowers future benefits if she's going to draw on her own record vs. 1/2 of ex-husband's. Also does not happen for free and has some accounting hassle to factor in (gotta pay to register the S-Corp, annual fees in most states, generally is advisable to pay for payroll services which runs from $8 / month to $40+ in my experience). Also gotta file 1120S annually at minimum with the feds, possibly something with your state as well.

With only $75K gross available to divvy-up, and potentially costing quite a bit in SS benefits in the future, I'm not 100% sure the juice is worth the squeeze here as far as setting up for S-corp treatment.

[terran]

What does she do with this inventory? I find it surprising that she wouldn't have business mileage when she deals with this inventory either by delivering it to customers or bringing it to the post office. Or is it all shipped from her home?

[hooplady]

If she has inventory, doesn't she have cost of goods? I'm struggling to understand the nature of the work.