I Finally Met with a CPA About My Tax Strategy to Save $30,000 in Taxes this Year: Here’s What I Learned
On today’s episode of, “Katie posts about a situation that’s so niche, it’s unhelpful to almost everyone,” I present to you: My first meeting with a CPA!
I have a lot of #respect for CPAs because I am a personal tax code enthusiast, and I admire anyone who attempts to tackle it professionally. You can’t fake your way to a CPA – you have to know your shit.
The CPA I worked with came highly recommended from a family friend of my parents who used to work with Warren Buffett at Berkshire Hathaway, so I had high hopes (that sentence makes us sound wealthy and mysterious – we aren’t).
Upon walking in his office, I knew I had a winner. He had that nutty professor vibe – tons of filing cabinets and boxes of hand-labeled files, old-school calculators, books upon books of tax code, and gentle “cool grandpa” vibes.
If you’re a W-2/1099 gal like me, these questions are worth asking your CPA.
Question #1: Am I going to pay a penalty for underpayment?
One of my major questions for the 2021 tax season was about whether or not I was going to get ruthlessly penalized by my #boiz at the IRS for not paying any tax this year on my 1099 income, but Terry confirmed what I thought was the case:
Because I will have paid 100% of my tax liability from last tax season, I’m safe. There's a 110% threshold for incomes over (I think) $150,000, which we’ll fall into this year, but even then, I think I’ll have paid more than 110% of last year’s tax bill this year.
What does this mean?
I have two sources of income: W-2 (from which taxes are withheld) and 1099 (Money with Katie, from which no taxes are withheld).
I know I’ll owe a lot of tax money on my self-employment income, but I didn’t want to pay the penalty – I don’t remember what it is off the top of my head, but I’m pretty sure it’s a percentage of either the income or tax owed. No bueno.
The TL;DR: My income this year was much higher than last year and I was nervous that I may get dinged for underpaying.
Fortunately, I’ve already paid more in tax on my W-2 income this year than I did last year (e.g., if I owed $20,000 last year, I’ve already paid more than $20,000 in taxes this year), so I’m safe.
Main takeaway: If you’re making way more money this year and it’s 1099, you may still be O.K. with regards to penalties as long as you’ve paid 100% of the tax liability you paid last year.
Question #2: Are my pre-tax investments legitimate, or am I over-contributing?
Pre-tax investing is my favorite because it basically allows you to save taxes on money you’re keeping, vs. money you’re spending (how most common deductions work).
To make matters hornier, your tax savings on pre-tax investment contributions come from your highest marginal tax bracket – this means you’re shaving off the most expensive part of your tax bill.
I’m in a fortunate situation I never thought I’d be in, tax-wise: My “problem” is that I’m trying to defer as much income as possible, because my tax rate would be high otherwise.
But hey, I got married at the exact right time! Thanks, husband.
(Married Filing Jointly works great for us as two full-time workers with one individual running a business on the side – if all of my income were in the single tax brackets, I’d be paying 35%. Because we’re married, it’s 24%. Married Filing Jointly is usually preferable, tax status-wise.)
You can legitimately defer up to $69,000 of income per income source in 401(k)s for 2024, but employer matches count toward the $69,000 limit. However, matches don’t “defer” any income, since they’re just a tax-free contribution from an employer.
What does this mean?
I had a 401(k) through my employer, and I opened a Solo 401(k) for Money with Katie. I opened mine with Vanguard – all you need to open it is an EIN and other basic information.
The super-extra good part? Even if you’re like, Shit, I didn’t contribute to one in 2023! The contribution deadline is the filing deadline, so you have until April 2024 to make your 2023 contributions. Bless up.
Here’s the rub, though, if you’re like me and have a “job 401(k)” – you can’t make employee contributions to your Solo 401(k), because the employee limit for 2024 is $23,000 across ALL 401(k)s.
In other words, you can’t contribute $23,000 as an employee to two different 401(k)s. You can only contribute $23,000 total as the employee.
The hack? You can make contributions to your Solo 401(k) as your own employer. You’re the boss, bitch.
Here’s what my breakdown looked like in 2021, when I first ran the math and the limit was $19,500:
$19,500 contributed to my employer 401(k)
$9,750 contributed by my employer match
…that’s the “job 401(k)” bucket, right? So what about the Solo 401(k)?
You’re only allowed to contribute up to 20% of your net business income into a Solo 401(k) – so in order to put in a full $69,000 that number would have to represent 20% (or less) of Money with Katie’s net business income.
In other words, Money with Katie would have had to make $345,000 in 2023 to contribute the full $69,000 of “employer” contributions. Spoiler alert: It did not.
To calculate yours, take your net business income (revenue – expenses) and multiply by 20%.
Main takeaway: If you have a W-2 job and 1099 income from your own business, a Solo 401(k) can help tremendously with helping to defer taxable income.
One other thing to note here: I was originally going to use a SEP IRA (similar to the Solo 401(k)), but since a SEP IRA technically codes as a Traditional IRA, it would’ve prohibited me from enacting the spicy “backdoor” Roth IRA strategy.
Here’s more about self-employment retirement account options.
Question #3: Are there any other pre-tax contributions I could be making that I haven’t considered yet?
Like I said, I feel pretty lucky to be in a situation that I never thought I’d be in: Trying to figure out the most efficient places to hide my income from the government is fun, if nothing else.
I have an HSA (with a contribution limit of $4,150), so I knew I wanted to contribute the maximum to that, too. Apart from the:
Job 401(k) or 401(k) equivalent
Solo 401(k) or SEP IRA
HSA
There weren’t any other pre-tax options available.
Question #4: What’s my self-employment income tax going to look like? What about the Qualified Business Income deduction? Do I qualify?
Fun fact: If your income in 2024 is more than the $168,600 income limit for social security taxes, you don’t have to pay the social security portion of the FICA taxes. This makes up the majority of self-employment tax, so it’s a big deal.
(For reference, roughly 12% of the 15.3% self-employment tax is social security.)
I wanted to confirm that with Terry, as well as ask him if he thought I’d be eligible for the QBI deduction, which allows a business owner to deduct 20% of their income clean off the top.
That means if your business’s net business income was $100,000, you can pretend you only made $80,000 for tax purposes.
Without my pre-tax investment contributions, we’d be over the income limit for the QBI deduction. Thanks to our contributions, we were under the limit. HYFR! QBI deduction here I come. Another reason to MAXIMIZE those pre-tax contributions, ladies.
What does this mean?
You probably qualify for the QBI deduction if you own a business as long as you can get your adjusted gross income below $464,200 for married filing jointly (adjusted gross income = taxable income after most deductions).
In summary
If you’re a tax nerd like me and a born #optimizer, you may enjoy learning about this puzzle and putting together the pieces. For the majority of people, this was probably a high blood pressure fest with a lot of expletives.
The good news? Terry told me that most tax softwares are usually pretty up-to-speed and will make these distinctions for you, as long as you answer all the questions correctly.
So if you realize as you’re filling out your taxes that you need to defer some income to lower your tax bill, you’ve got last-minute levers you can pull (the Solo 401(k), SEP IRA, Roth IRA, and HSA allow contributions up until the tax filing deadline).
In 2021, we were able to lower our taxable income from roughly $419,000 to $320,000 through the standard deduction and pre-tax contributions to investment accounts, lowering our tax bill from roughly $104,152 to $74,942, saving about $30,000 in taxes. I’ve continued this trend as much as possible since.
So, as always, I’ll be doing my own taxes this April. Will you?
