Have a Client that Wants to Lessen the Impact of Their Taxes

[Justin Bilyj]

I have a client that is 28, self-employed, made 36k in income. She calculated her taxes and found out she owed $4,300 in taxes (ouch).

She is trying to find ways to bring that number down. She has a 401k from a previous employer, and she is open to starting a Traditional IRA.

Two questions; can she still rack up business related expenses and put it on her 2013 tax returns, to lessen her income?
How much would she have to sock away into a qualified plan in order to bring down the taxes she owes?

I appreciate any help, thank you.

 

[DHK]

I am not a tax advisor.

That being said...

I have a client that is 28, self-employed, made 36k in income. She calculated her taxes and found out she owed $4,300 in taxes (ouch).

She is trying to find ways to bring that number down. She has a 401k from a previous employer, and she is open to starting a Traditional IRA.

Two questions; can she still rack up business related expenses and put it on her 2013 tax returns, to lessen her income?

Not that I can think of. All receipts would have to be dated for 2013, so that time has passed.

How much would she have to sock away into a qualified plan in order to bring down the taxes she owes?

I appreciate any help, thank you.

Is she so worried about this year's taxes that she doesn't care about the future rate of taxes in retirement when she pulls the money back out?

If she doesn't care about the future taxation of withdrawals from her qualified plan... then, depending on if she has employees (probably not), then I'd recommend a SEP-IRA contribution.

Just do a reverse calculation on her owed tax. Assuming she's in the 25% tax bracket, then $4,300 / 25% = $17,200 contribution required to eliminate that tax obligation.

Then you can have the conversation about if she thinks she'll be in the same tax-bracket in retirement or not. If not, then she might as well pay the taxes this year, and put the money into something that can be "tax-free" in the future... something like a Roth IRA, but with a larger death benefit?

 

[scagnt83]

I have a client that is 28, self-employed, made 36k in income. She calculated her taxes and found out she owed $4,300 in taxes (ouch).

She is trying to find ways to bring that number down. She has a 401k from a previous employer, and she is open to starting a Traditional IRA.

Two questions; can she still rack up business related expenses and put it on her 2013 tax returns, to lessen her income?
How much would she have to sock away into a qualified plan in order to bring down the taxes she owes?

I appreciate any help, thank you.

She is in a 15% tax bracket (plus whatever she owes the state).
The 15% tax bracket is from (if I remember right) 10k-36k.
If she gets her income down below 10k she can be in a 10% tax bracket. That is a long way to go though.

Tell her welcome to the real world.... then ask her who she voted for.... just wait until she makes an extra few thousand and it kicks her up an extra 10% into a 25% tax bracket!! lol

 

[DHK]

Thank you. I forgot that emptyeternity mentioned the income limit.

At a 15% tax bracket, she can make a 2013 SEP-IRA contribution of $28,667 to eliminate the $4,300 tax due for 2013.

In short, tell her that there's no such thing as a free lunch when living in the USA... unless you come here illegally.

 

[Justin Bilyj]

Now I know you guys aren't tax advisors, but she said she gave $3750 to a friend going through tough times, is she able to deduct that as a gift?

 

[DHK]

Gifting, etc., all have to do with estate planning.

The federal estate and gift tax rates consist of a single unified table that is progressive and applied to the cumulative value of all taxable lifetime gifts and to transfers at death.
In 2014, the unified rates begin at 18% of a taxable gift or estate that does not exceed $10,000 and increase to 40% of a taxable gift or estate that exceeds $1,000,000.

Can she claim him as a dependent? (That would be a bigger deduction for her, as long as he isn't married and no one else can claim him and he's living with her?)

I bet he is not a recognized 501(c)3 charitable organization...

She could probably write it off as a "bad debt" that could not be collected on?

Has she itemized her business mileage yet? 55c per mile ain't bad, and it adds up... if she documented it.

 

[LGilmore]

I guess the question is does she have the money "free" to push the taxed level down. I caught one post where if she committed around 28k she could consume that tax hit. Cept if she's making 36k total, what does she have to live on?


She doesn't have the money to eliminate much of those taxes.


Is she reporting with a schedule C? Does she have an accountant? There is tax software out there that can let her know what she can contribute.

 

[scagnt83]

She doesn't have the money to eliminate much of those taxes.

When you dont have sh$$ you cant do sh$$....

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At a 15% tax bracket, she can make a 2013 SEP-IRA contribution of $28,667 to eliminate the $4,300 tax due for 2013.

Actually she is limited to just 25% of Adjusted Gross Comp with a SEP. So she can only contribute $9k which would still leave her in a 15% tax bracket, and would only be around a $1,350 tax reduction at a 15% bracket.

She could then do a Traditional IRA, and throw in an extra $5,500 (too late this year), which would be around an $800 tax reduction.


So by cutting her income in half she can cut her taxes in half

 

[VolAgent]

She could then do a Traditional IRA, and throw in an extra $5,500 (too late this year), which would be around an $800 tax reduction.


So by cutting her income in half she can cut her taxes in half

What do you mean too late this year? You have until April 15th to contribute to a IRA or Roth IRA for the tax year. Ie, 4/15/2014 for the 2013 tax year.

 

[jmhalvo]

Now I know you guys aren't tax advisors, but she said she gave $3750 to a friend going through tough times, is she able to deduct that as a gift?

if she is W2, you are confusing write offs (1040 below the line) with income lowering (above the line). This one is simple! She either can lower her income dollar for dollar with an IRA or not! end of story

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And of course gifts to friends are not relevant