Advanced tax strategies you may want to consider

February 16, 2015


hese tax strategies are little known to most taxpayers who do not have access to expensive tax certified public accountants and tax attorneys. I will give case studies where a particular strategy might be used.

Situation No. 1: You are a self-employed individual (Schedule C unincorporated or with a corporation) who wants to save tax. You feel you are paying too much tax and want at least $17,500 of tax deductions. You are not an employee with a company that offers a 401k but need more tax deductions than the $5,500 annual contribution ($6,500 if age 50 or above) limit for an IRA. Solution: You can have a solo 401k, also known as the family 401k plan. The key is that you are a sole proprietor or operate the business with your spouse and have no non-family employees. Assume that your spouse works in the business with you and is under age 50. She can contribute $17,500 annually to the solo 401k plan, and this is called employee salary deferral. In other words, if your spouse was paid $17,500, she could put all of $17,500 into the solo 401k plan. If she was paid $12,000, she could put a maximum of $12,000 into the solo 401k plan.

Assume you are age 50 or older and now you could also contribute a maximum $23,000 employee salary deferral to the solo 401k plan. If you have reasonably high profits, you would want more tax deductions. You can also use the employer contribution (if you are both the employee and the employer), which is calculated as 20 percent of your net earnings if your are a sole proprietor and 25 percent if your business is a corporation. There are some technical details involving the calculations, but the concept is what we cover in this article. If you were age 50 or older by Dec. 31 2014, you can save up to $56,500 in the solo 401k plan. This is a combination of the employee salary deferral and the employer contribution.

Situation No. 2: You are a parent or grandparent who wants to leave a tax-free legacy to your younger spouse, children or grandchildren. A retired nurse from California came into my office almost three years ago. She had two government pensions and Social Security, and she had much more income than she could spend. Her daughter was a high-income doctor and her son had died. There were two grandsons, twins age 9. We structured a Roth conversion of the $385,000 that she had saved and paid the conversion tax. She does not need the Required Minimum Distribution income, and this will not be required once we do the Roth IRA conversion. The two grandsons will each get slightly more than $2 million of tax-free income during their lives. Once she dies at an assumed age 91, each grandson will get $7,000 annually at age 25; $11,000 at age 35; $17,000 at age 45; $27,000 at age 55; $43,000 at age 65, $69,000 at age 75; and $90,000 at age 80. I realize that not everyone has $385,000 in an IRA, but imagine the legacy left if you only started with $100,000 and it became up to $1 million of tax-free income. The multiplier is still 10-1.


Harold Wong can be reached at 480-706-0177,, or For his archived articles, go to

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