Episode Seventeen: Year-End Tax Savings for W-2 Employees and the Self-Employed

In this episode, Lance and Randy discuss year end tax savings strategies and the importance of being prepared with them months before you hit your tax preparer’s office. They also touch on health care deductions and the wisdom of such win-win strategies as having your children work for your business.

What you’ll learn in this episode:

• Lance and Randy to discuss the importance of year-end tax savings strategies. Randy emphasizes that this is the time to do it. You shouldn’t be walking into your tax preparer’s office in the spring and ask, “What are we going to do to reduce the taxes I pay?” He believes that every month’s a good time to do tax planning.
• As an investment advisor, it’s difficult for Randy to find safe, liquid investments that will provide 5-6% rates of return. For anybody who’s in a marginal tax rate of 22-24% plus state tax, or even 30-50%, every dollar you save on that margin, if it’s the exact amount you are making, it’s like making 50% return on your money.
• Lance believes that each of us is ultimately responsible for our own tax strategy. We have to be the quarterback. If you’re in the 25% tax bracket, every decision you make between now and the end of the year could be worth a 25% return. No risk.
• Randy says there are limited deduction options for strict W-2 employees. If they are fortunate enough to work for a company that has a sponsored 401(k) or 403(b), they can “squirrel away” some pretax dollars into those plans and get tax deductions. But he encourages these employees to take a deep dive into the company sponsored plans to understand the benefits. Because those are not real tax savings – only tax deferrals.
• Randy encourages W-2 employees to get a side gig, which would include owning rental properties. A side gig can offer many tax deductions and benefits. The greatest tax breaks go to self-employed businesspeople. One advantage a W-2 employee has over a purely self-employed person is that their employer pays half of their self-employment tax. That’s half of their FICA tax, up to $138,000 of earnings. If you also become self-employed, you won’t incur any of that self-employment tax. You can put those earnings into a solo 401(k) or solo Roth 401(k).
• Your business can get tax deductions and make contributions even if you don’t show a profit on paper.
  *Randy advises self-employed people to pay all the bills they can before the end of the year – and prepay anything you can. If there’s equipment you can buy, bills or insurance premiums you can pay, do it. Then if you don’t need it immediately, push all the income out to next year, because you might want to bring some in to top off a tax bracket or push it out to get to a tax bracket.
• You need to see what your taxes might look like based on what you’ve done so far this year. For some, the right strategy might be to bring even more income in this year and top out a tax bracket and spend less.
• If you’re self-employed, take all the deductions you are allowed, including your home office. Another deduction is your mileage if you do any driving related to your work. You can also deduct part of your insurance and part of your taxes. Telephone, internet, Wi-Fi, …even your gardening.
• Randy is a proponent of income shifting for parents who own businesses whose children are under 18. Kids can be paid a little more than $12,000 a year, by their parents, to work for their parents’ company. The company can take a deduction and the kids don’t have to file a tax return. “Good tax deductions and fiscal responsibility for your kid,” he says. They can use that money for private school, the college fund or even a Roth IRA.
• Income shifting can also apply to senior parents, as in paying money to our grandparents or parents to take care of them. Or you can hire them to do something for you.
• Self-employed people should expense their healthcare deductions properly so they can deduct 100% of them. You want your company to pay your health insurance as a self-employed.
• Randy offers guides for different categories of tax strategies, including the Home Office Guide and the Medical Deduction Guide. The second discusses the importance of creating an HSA, a health savings account, which will allow you to put pretax dollars into this account to buy over the counter drugs and pay for your deductibles and co-pays.
• The Medical Deduction Guide also discusses the Health Reimbursement Account (HRA), which will reimburse you dollar for dollar for all the expenses turned in. If you have higher expenses, HRA is the better deal. And it’s possible to create both simultaneously.
• Randy suggests people email him at Randy@LifetimeParadigm.com to learn about deductions offered through a Super K and captive insurance company.
• Lance and Randy touch on cost segregation, which Lance covered in depth in a previous podcast with Todd Strumpfer.
• Lance says, “Your job, your purpose in life, should be to buy enough rental property now so that you don’t pay taxes for the next five years because you’re going to bank up all this 100% bonus depreciation and take the credit and let it work its way out. Because on January 1, 2023, that 100% bonus depreciation starts dwindling back down.” conversion, which has no limits.”

Resources:

LanceSchool.com

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