401(k) plan can help trim taxes

first_img AD Quality Auto 360p 720p 1080p Top articles1/5READ MOREGame Center: Chargers at Kansas City Chiefs, Sunday, 10 a.m.Another point worth noting – your e-mails show many don’t understand this point – is that your tax bracket depends solely on your taxable income for the year, not on how much you have saved. You can have retirement accounts in the seven figures and be in the lowest tax bracket as long as your taxable income, including any retirement plan withdrawals, doesn’t exceed a certain amount (for 2007, $63,700 for married couples filing jointly). To keep our taxable income low, we rely primarily (but not exclusively) on self-employed 401(k) plans available since 2002 under a 2001 tax law. All self-employed individuals and owner-only businesses are eligible to set up these plans and save on taxes. The savings can be substantial. Regular contribution limits for 2007 are $15,500 in salary deferral for each person, plus one-fourth of compensation (business income minus expenses), up to a total maximum of $45,000. People 50 or over like Georgina and me are entitled to an additional $5,000 “catch-up” salary deferral, making the overall maximum contribution $50,000 per person this year. None of the money contributed counts as taxable income until withdrawn. Georgina and I each contribute the maximum allowed based on our income. These higher contribution limits are one benefit of being self-employed. In a regular 401(k) plan, 2007 limits are $15,500, plus a $5,000 catch-up contribution for workers 50 and over, still a substantial amount. A chance remark on a column about year-round tax savings has prompted a few skeptical if not downright cynical responses. I mentioned that my wife, Georgina, and I are in the 15 percent tax bracket, the second lowest (brackets range from 10 percent to 35 percent). Many readers wanted to know how that could be, thinking we are resorting to tax trickery. “Hmm, let’s see,” began one e-mail. “You and your wife stash away lots in your pension plan and write off many expenses since you are self-employed. You need to get a substantial raise, maybe? Better hope some IRS agent reading your column doesn’t get too curious.” Allow me to give you the prosaic scoop, showing how saving on taxes is a fairly straightforward matter, with self-employed individuals enjoying some additional opportunities. But working for ourselves, we are saddled with hefty health insurance premiums and must pay double in Social Security and Medicare taxes (both the employee and employer share). The self-employed can at least subtract health insurance premiums and one half of Social Security and Medicare taxes from their taxable income. After also subtracting self-employed 401(k) contributions, our combined adjusted work income last year amounted to just $12,911. We wouldn’t owe a cent of income taxes on that amount because our normal personal exemptions and standard deduction alone added up to $16,900. If not for other taxable income, including interest and dividends, we wouldn’t have owed any income tax (we would have still owed Social Security and Medicare tax). And yes, we took the standard deduction – which has risen to $10,700 for married couples filing jointly in 2007 – because we didn’t have enough eligible deductible expenses to exceed that amount. As to “business expense write-offs,” which are separate from standard or itemized deductions, we claimed all of $49 last year for “meals and entertainment” (lunches with visiting out-of-town sources) and $210 for supplies and office expenses (mostly printer ink, envelopes and paper). We each did claim expenses for the use of a home office, since we both have a room we use regularly and exclusively for business. This legitimate but misunderstood deduction saved us $469 in taxes, a fair amount but not the thousands many readers thought. Send questions or comments to Humberto Cruz at [email protected] or c/o Tribune Media Services, 2225 Kenmore Ave., Buffalo, NY 14207. Personal replies are not possible. 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set!last_img