I give up on managing income taxes

[corn18]

Retired. Managing Roth conversions and tax gain harvesting LTCG @ 0%. Had a great plan this year to harvest LTCG @ 0%. Friend called with an opportunity to do something interesting for 1099 pay. Just ran that through my tax model and the marginal rate on the 1099 income will be 45%:

15% Self employment tax
12% Federal income tax
3% State income tax
15% LTCG tax (every dollar of 1099 income pushes my LTCG into the 15% bracket)

45%. Maybe I should ask him to just pay me next year. Don't need the money. Can I do that? Not much better next year, though. The rate will be 40% unless I don't do a Roth conversion.

 

[pb4uski]

Yes, you can do that as long as you are sure you will get paid next year since you are a cash basis taxpayer.

I personally wouldn't include SE taxes but it may make sense in your case since it is cash out the door and I'm guessing won't change what you eventually receive in SS.

I was telling someone a couple hours age that I retired from a job that I enjoyed because I realized that we had enough and continuing to work was ust enriching the federal and state governments and our heirs and that I decided that I wanted that time for me instead.

 

[RunningBum]

Couldn't you defer most of the income with a 401K/IRA contribution? I think the max contribution is pretty high for a self employed individual, isn't it? Eventually you'll have to pay tax on it but you can probably wait until you are at a lower tax rate. I'd do this rather than ask him to defer payment to next year when you project it to be only 5% lower. What if his business collapses and you get nothing?

 

[corn18]

Couldn't you defer most of the income with a 401K/IRA contribution? I think the max contribution is pretty high for a self employed individual, isn't it? Eventually you'll have to pay tax on it but you can probably wait until you are at a lower tax rate. I'd do this rather than ask him to defer payment to next year when you project it to be only 5% lower. What if his business collapses and you get nothing?

Hadn't thought of that. Looks like FIDO has a simple solo 401k I can open up and put all the earnings in there. Max contribution should be less than my net profit for this gig. Thanks!

 

[TheWizard]

Alternately, ask for a higher pay rate to cover taxes: $150/hr rather than $90/hr, for example. Take it or leave it...

 

[corn18]

Here's a question:

$20,000 1099 income

Based on what I have read online:

Net income for tax purposes:

$20,000 - 15% = $17,000

This is what I report as business income on my taxes.

But my net compensation as defined by the IRS for the purposes of solo 401k contribution limits is my compensation minus half of the self employment tax. So my max 401k solo contribution should be

$20,000 - 7.5% = $18,500.00

Seems weird, but that is how I understood it.

 

[copyright1997reloaded]

Hadn't thought of that. Looks like FIDO has a simple solo 401k I can open up and put all the earnings in there. Max contribution should be less than my net profit for this gig. Thanks!

This is the way. My teaching gig (at first part time, then full time) over the past 14 years (until I retired AGAIN) I mostly used the $ towards a 403B & 457. Some I did traditional (deferred) and some ROTH. It was sort of a replacement of my original plan of doing Roth conversions, i.e. instead I used my pay towards that. My typical take home was minimal...in fact on some occasions they had to "hand process" my paycheck info as it would have been negative.

I mostly paid taxes using my mega-corp pension (so I could do as much as possible on the 403B/457 college pay account).

I can only imagine what they thought in payroll w/me going year after year full time + overload and essentially not drawing a paycheck.

 

[calmloki]

Been trying to figure out tax management - we've just kept making money and living our normal thrifty lives and the ducats stack up. Still have the paid-off rentals kicking off maybe double our annual outgo. Sold a number of the rentals and am taking payments, lent some money; again maybe double our annual spend coming in. Thought I'd be real smart and avoid California taxes through T-bills, but that doesn't avoid fed taxes. Our stocks have mostly been held so long that we never came close to being able to tax loss harvest. Even those are throwing off dividends. As problems go, this ain't so bad, but I like to be efficient, I like money to work hard, and I'd prefer to choose where the money gets spent rather than having some well meaning government officials choose.

We are kid free, but do have those we wish to gift. I really like the idea of stepped up capital gain basis. Reading about DAF and such like, but I had a flash - why not just buy a bunch of stuff like BRK-B or Amazon, stocks that don't pay dividends, and let them quietly amass unrealized gains? We maintain control till we die, annual income can be dropped a bunch, heirs get stepped up basis (tax laws may change, but that's true of just about anything), money keeps making money, life is simple. Or maybe I'm simple. Other thanAmazon or Berkshire being blown up and their stock going to zip what all am i missing?

 

[SevenUp]

Here's a question:

$20,000 1099 income

Based on what I have read online:

Net income for tax purposes:

$20,000 - 15% = $17,000

On what form/schedule line would you take that subtraction? You would get to subtract $1413 on line 15 of Schedule 1, and $717 on line 13 of Form 1040, but not a $3K subtraction.

Then you also get the $15K standard deduction to drop your taxable income to $2870.

 

[corn18]

On what form/schedule line would you take that subtraction? You would get to subtract $1413 on line 15 of Schedule 1, and $717 on line 13 of Form 1040, but not a $3K subtraction.

Then you also get the $15K standard deduction to drop your taxable income to $2870.

I figured it out with this calculator:

Solo 401(k) Contribution Calculator — Oblivious Investor

 

[SevenUp]

I figured it out with this calculator:

Solo 401(k) Contribution Calculator — Oblivious Investor

Oh, if you are considering optional contributions on top of mandated tax law calculations, then you could make anywhere from $0 to $18,587 as a solo 401k contribution.

 

[Time2]

Retired. Managing Roth conversions and tax gain harvesting LTCG @ 0%. Had a great plan this year to harvest LTCG @ 0%. Friend called with an opportunity to do something interesting for 1099 pay. Just ran that through my tax model and the marginal rate on the 1099 income will be 45%:

15% Self employment tax
12% Federal income tax
3% State income tax
15% LTCG tax (every dollar of 1099 income pushes my LTCG into the 15% bracket)

45%. Maybe I should ask him to just pay me next year. Don't need the money. Can I do that? Not much better next year, though. The rate will be 40% unless I don't do a Roth conversion.

I think there is a flaw in your reasoning. The 1099 income is taxed at 30%, then the additional LTCG income is taxed at 15%. Say you had $80k of 1099 income and $40k if LTCG income. Blending that gets you a 25% tax rate. You also get to take out the standard deduction. and half your self employment tax is a deduction.

 

[pb4uski]

On what form/schedule line would you take that subtraction? You would get to subtract $1413 on line 15 of Schedule 1, and $717 on line 13 of Form 1040, but not a $3K subtraction.

Then you also get the $15K standard deduction to drop your taxable income to $2870.

That $2,870 is what I get with IRS & State Tax Calculator | 2005 -- 2025

 

[SevenUp]

Retired. Managing Roth conversions and tax gain harvesting LTCG @ 0%. Had a great plan this year to harvest LTCG @ 0%. Friend called with an opportunity to do something interesting for 1099 pay. Just ran that through my tax model and the marginal rate on the 1099 income will be 45%:

15% Self employment tax
12% Federal income tax
3% State income tax
15% LTCG tax (every dollar of 1099 income pushes my LTCG into the 15% bracket)

45%. Maybe I should ask him to just pay me next year. Don't need the money. Can I do that? Not much better next year, though. The rate will be 40% unless I don't do a Roth conversion.

Assuming you start with $15K ordinary income (interest, Roth conversions, etc.), $48350 LTCG, and live in Indiana (flat 3% state tax), you would owe $0 federal tax and $1871 state tax.

Add $10K self-employed income and you would owe $1413 SE tax, $1858 federal tax not including SE tax, and $2149 state tax, for a total of $5420. Your marginal rate on that $10K income would be (5420 - 1871)/10000 = 35.5%. If the SE income goes above $16K then you'll reach a marginal rate of 37%.

Still a good chunk but not 45%. And you can reduce the impact by making solo 401k contributions as already discussed. Numbers above come from

the case study spreadsheet that we have found to be accurate when comparing with TurboTax over the past several years.

 

[Lucie]

Don’t forget that you can deduct business expenses if you are 1099. Need a new laptop? Printer? You can also make legitimate deductions for business meals, mileage, cell phone, and home office, etc.

 

[corn18]

Don’t forget that you can deduct business expenses if you are 1099. Need a new laptop? Printer? You can also make legitimate deductions for business meals, mileage, cell phone, and home office, etc.

I have been considering this. Now that I can do the solo 401k, I am much happier. If I deduct a laptop, it is zero tax vs. putting it in the 401k and deducting it on withdrawal so that is nice. What I really want to deduct is the business clothes I have to buy for this gig. I got rid of all of that and need to buy some to get by. Not a huge dollar amount but irritating. IRS says I cannot deduct it, though.

 

[Midpack]

Not 45% anyway. My marginal rate is 22% and cap gains is 15% but that doesn’t mean I pay 37%, actually less than 14% after all. About 18% including state taxes.

 

[corn18]

Not 45% anyway. My marginal rate is 22% and cap gains is 15% but that doesn’t mean I pay 37%, actually less than 14% after all. About 18% including state taxes.

It's a marginal rate. Right now, I have harvested LTCG up to exactly the top of the 0% LTCG bracket. If I make $1 of additional income, that is taxed @ 12% for income tax, and pushes $1 of my LTCG into the 15% LTCG bracket. So the marginal effective rate on that $1 of additional income is 27%.

 

[cathy63]

I have been considering this. Now that I can do the solo 401k, I am much happier. If I deduct a laptop, it is zero tax vs. putting it in the 401k and deducting it on withdrawal so that is nice. What I really want to deduct is the business clothes I have to buy for this gig. I got rid of all of that and need to buy some to get by. Not a huge dollar amount but irritating. IRS says I cannot deduct it, though.

You are right that you can't deduct ordinary business clothes. But you also can't deduct the laptop unless it's used 100% for business. If you have any personal use, then you can only deduct the pro rated portion that is used for business. Same for cell phone and internet costs, software purchases or subscriptions, printers, paper, ink, etc.

 

[COcheesehead]

We deducted so many business expenses for my wife’s photography business to get her income down, but after 2-3 years of doing that TurboTax gave us a warning that the IRS may consider it a hobby and not a business.

 

[SevenUp]

It's a marginal rate. Right now, I have harvested LTCG up to exactly the top of the 0% LTCG bracket. If I make $1 of additional income, that is taxed @ 12% for income tax, and pushes $1 of my LTCG into the 15% LTCG bracket. So the marginal effective rate on that $1 of additional income is 27%.

Yes, that's a classic example as shown in Marginal tax rate - Bogleheads.

It does seem (see a previous post) that your self-employment marginal rate would be 35-37% instead of 45%. Do you concur?

 

[jebmke]

Yes, that's a classic example as shown in Marginal tax rate - Bogleheads.

It does seem (see a previous post) that your self-employment marginal rate would be 35-37% instead of 45%. Do you concur?

I think the calc OP is referring to is 27% (marginal FED income tax) + 3% (State income tax) + 15% (FED SE tax)

 

[SevenUp]

I think the calc OP is referring to is 27% (marginal FED income tax) + 3% (State income tax) + 15% (FED SE tax)

Although it doesn't work quite that way. See this post for some numbers.

 

[corn18]

Although it doesn't work quite that way. See this post for some numbers.

Well, all I know is if I get paid $100 for my side gig this year, I will pocket $55. That's all I care about.

Thanks to the poster who said open a solo 401k, at least I can put $88 of the $100 into the 401k and decide later how to best manage the taxes. I like that better. Maybe I'll let my kids pay the taxes after we die.

 

[SevenUp]

Well, all I know is if I get paid $100 for my side gig this year, I will pocket $55. That's all I care about.

In that case it will be a pleasant surprise when you get to pocket $63 or so.