I recently had my bathrooms remodeled. The contractor did a fantastic job. But Armin was also a perfectionist. He wanted it to be exactly right. So, he asked me specific questions about everything from tile placement to grout color.
Of course, I had no idea. If I had the foggiest clue about what looked good, I would have done the work myself and saved thousands of dollars. So, my usual answer was:
“What would you do if it were your house?”
And, in the end, it looked great.
This situation got me thinking about what we do here on Money & Markets.
I can’t tell you what to do with your finances. I can offer tax tips or guidelines, but I don’t know the specific details of your life.
Instead, I can tell you what I am doing to lower my tax bill. Maybe something in my approach makes sense for you.
More Tax Tips: How I Protect My Funds
HSA and 401(k)
This week, I dumped an extra $5,000 into my health savings account (HSA). This puts me on track to hit the maximum contribution of $7,200 in 2021 for a person under 50 with a family plan.
I’m not expecting any major health expenses between now and the end of the year. But I use the HSA as a “spillover IRA” to sock away a little extra cash tax-free.
If unexpected health expenses pop up — I’ve lost track of the emergency room visits for my three kids a long time ago — I can always use the funds. But until then, I treat it like another IRA.
I have a 401(k) plan at work, and I’m on track to max it out for the year at $19,500. That’s low-hanging fruit.
But I also earn “side hustle” 1099 income, and I contribute to an individual 401(k) to shelter some of that income.
This can get tricky. Since I’ve maxed out my workplace 401(k), I can’t make salary deferrals. But I can make “employer contributions.” Following the IRS rules here, I’ll dump 20% of my 1099 earnings into the individual 401(k).
And for one final tax tip, I pay my wife a salary for the work she does in our side business. We then dump almost all of her pay into an individual 401(k) in her name.
Now, if you want to try this yourself, you need to know a few things:
- It has to be real employment. There needs to be actual work done, and the pay for that work needs to be reasonable. You can’t pay your spouse a million dollars to mail a letter for you. If they are doing light administrative work, then you should pay them an appropriate salary for an administrative assistant.
- You need to be formal. I bought QuickBooks to handle her payroll. I even create legitimate paychecks, complete with tax withholding.
Something like that may or may not make sense for you. If you think it does, I recommend you chat with your tax preparer before taking any action. You don’t want to mess it up and end up with an intimidating letter from the IRS.
As you can see, I don’t get too fancy in my tax planning. You won’t see me setting up offshore trusts or dodgy Caribbean LLCs. Why would I bother with any of that when I have better, cleaner and easier-to-implement strategies here at home?
Note: The deadline to fund an individual 401(k) is the tax filing deadline, or April 15, 2022. While funding is flexible, the setup is not. In order to contribute to an individual 401(k) for tax year 2021, you have to have the account established by December 31, even if it has a zero balance.
To safe profits,
Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.