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Tax help - spouse working from home


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My wife and I are trying to figure out a way to lower our taxes. This past year was a real eye opener for us and I know we can make some improvements on how to help with our tax situation. Here is our story.

My wife works from home as an external consultant for a bank and makes about 80k a year pretax. She must pay both employee and employer payroll taxes (15.6% ? ). We went to an H&R block consultant and she was amazed we owed so much for our combined income but did not have any suggestions that seemed helpful. The only thing she said was my wife could ONLY put 12k a year max into her retirement (we found out later through my Vanguard advisor she was ill-informed.) 

To lower our tax burden, here is what we did LAST year....I maxed out my 401k. We itemize her home deductions but they did not amount to much at all...Thats about it...She put nothing into her retirement account. She currently still has a 401k through her former employer but cant contribute to it.

THIS year I will max out my 401k and she has been informed to start a solo-401k? via our vanguard advisor. She is in the process of getting her EIN from the social security website ? and then can save up to 25% of her income pretax. She will rollover her old 401k into an IRA I believe...

My questions are...

Is this the right path for her/us ? We itemize her office deductions but they are not a lot. She has a home office but really the square footage she puts is not much and doesnt amount to much in terms of savings. Should she form an LLC company ? Is the solo 401k path the best path to take to save as much money as possible ? What else can we do that will significantly lower our tax burden?

 

It seems like we are missing something big here as our overall joint tax rate after deductions last year was 22%. It was ridiculous.

 

Thanks

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Isn't there a $10, 000 cap starting next year anyway on itemized deductions?  Even itemizing now is going to be a waste of time, especially since next year at least the standard deduction it's going to nearly double to $24, 000 for married couples. So that's going to really reduce my taxes and make it a hell of a lot faster to do my return (I for one heartily approve of the change!).

if you're still even going to bother to itemize at all,I don't really have any suggestions except give all kind of shit to churches or charities. Basically, it seems to be a $250 tax deduction for every thousand dollars you donate to charity.  Of course charitable deductions arer an audit flag, so if you do that have receipts. I pretty much just handwrite my maximum deductions Goodwill every year at a few dollars under the maximum before you need to have receipts, which I think was $500 last year.

Other than that, you can pop out a kid or two. Of course that's like not the best reason to have kids. But it's a reason.

Edited by phdhorn
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The main thing fucking you is "self-employment" tax and there aren't any deductions or credits against that.

I believe you are inelegible to make any further deductible contributions to a qualified plan (IRA, ROTH, etc.), but she is free to contribute to an IRA (doesn't need to be SEP or any of that, although you might get a larger deduction), up to the limit.  A Roth generates no deduction, so that's no help.

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Yep - A SEP IRA / SOLO 401(k) or similar strategy will allow you to contribute some of her income and reduce tax burden but doesn't really help with cash flow....just allows you to shift some tax payments to retirement accounts.  Better than nothing though, especially if you can afford to increase your overall savings rate.

You need a CPA to help you find eligible business expenses to use to offset her income.  There is probably more there than you are seeing.  

Those would show up on her schedule C and reduce that income that then flows to your taxable income.  This is separate from your standard or itemized deductions and reduces both income tax and self employment tax.

Twice is right in that paying both sides of the employment taxes are a big hit for 1099 or otherwise self employed folks.

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She can put the most away on the least amount of income with a solo 401k. Why not keep the money in the 401k? Why does she want to roll it over into an IRA? There are things that you can do with a 401k that you cannot do with an IRA and vice versa. 

What about a cell phone and/or internet?  Does she have any business mileage?

in general, an LLC only provides liability protections and not tax savings. When you say she’s claiming a home office, what is she claiming? Is she using the safe-harbor or actual expenses.  The safe harbor may be more beneficial. 

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1 hour ago, Reagan1k said:

Yep - A SEP IRA / SOLO 401(k) or similar strategy will allow you to contribute some of her income and reduce tax burden but doesn't really help with cash flow....just allows you to shift some tax payments to retirement accounts.  Better than nothing though, especially if you can afford to increase your overall savings rate.

You need a CPA to help you find eligible business expenses to use to offset her income.  There is probably more there than you are seeing.  

Those would show up on her schedule C and reduce that income that then flows to your taxable income.  This is separate from your standard or itemized deductions and reduces both income tax and self employment tax.

Twice is right in that paying both sides of the employment taxes are a big hit for 1099 or otherwise self employed folks.

Just so that I understand this.

We will most likely claim the following deductions for 2018 and use the following tax deferment strategies

$12k for me and 12k for her - standard deductions

2k for our son -standard child deduction

$6900 for our HSA

18400 for my 401k

12k for her new solo 401k - That is the amount she is ok with putting in without going crazy on her portion of the bills/expenses. I want her to pay more but maybe next year.

5500 for her tax deductible portion of her payroll taxes * see below

For her, and again, I am a complete newbie on this, her self employment tax (IE 15.3% for medicare and SS) is based off her (gross income)  minus (the self employment adjustment below) minus her (schedule C form OR safe harbor amount of $1500 (whichever is greater)), which is completely separate from and is ok to use with us taking the standard deduction?

Honestly now that I typed out the above line and looked at the graph below, maybe a better question is what is the 'Adjusted earnings' and how do you calculate that. I am confusing myself I think...

Also, she may be keeping her old 401k. We are getting conflicting information on how old 401k's work. Vanguard said they cant take her old 401k and roll if over to her new solo-401k.

Summary Table

Self-Employment Tax Analysis Social Security Medicare
'Adjusted' earnings $78,000 $78,000
Less: self-employment adjustment $5,967 $5,967
Taxable self-employment earnings $72,033 $72,033
Self-employment tax $8,932 $2,089
Total self-employment tax $11,021
Tax-deductible portion $5,511
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Don't sweat the old 401(k) . if it isn't already moved from the former employer, move it to a 401(k) rollover account and be done with it.

Whether or not it gets rolled into the new solo 401(k) isn't material to your tax issues.

Sit down with a CPA now and have him/her help you identify expenses that you can flow onto her schedule C.  There has to be some stuff you are overlooking or are mis-applying to itemized deductions (schedule C saves you the self employment taxes too)....things like phone, internet, vehicle supplies, etc.

It'll be worth it for sure.

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