| Deferring income | | | | Established by the Economic Growth and Tax |
| Shifting taxable income from the current to the | | | | Relief Reconciliation Act of 2001, Solo 401(k) plan |
| next tax year is useful only if you expect your | | | | provides a great tax break to micro business |
| next year's income to be equal or less than your | | | | owners. In addition to the possibility to shelter |
| current year's one.o Waiting for a bonus? Keep | | | | from taxes a large portion of income, some Solo |
| waiting. Applies only to Cash-Basis-Tax-Payers. | | | | 401(k) plans offer a loan feature for |
| See if you can receive it in January of next year. | | | | cash-strapped small business owners. |
| Doing so will exclude the bonus from this year | | | | Eligibility for a Solo 401(k) plan is limited to those |
| W2 / 1099 (and taxable income) and reduce your | | | | with a small business and no employees, or only a |
| taxes for this year.o Postpone interest income - | | | | spouse as an employee. This includes independent |
| Transfer money market account balance | | | | contractors with earned income, freelancers, sole |
| (savings), to a Certificate of Deposit. Make sure | | | | proprietors, partnerships, Limited Liability |
| that the CD pays interest only at maturity. | | | | Companies (LLC) or "S" corporations. |
| Interest income generated by the CD will be | | | | The key benefits of the Solo 401K plan include:o |
| taxable only when the CD matures, so you will still | | | | High limits on contributions: elective salary |
| get interest income only it will be taxed next | | | | deferrals and employer contributions allows sole |
| year.o Selling gaining stocks - Sell gaining stocks | | | | proprietors to contribute up to $42,000 ($45,000 |
| (current market price is higher than your original | | | | if age 50 or older) in tax year 2004, based on |
| cost) after January 1st of next year. There are | | | | salary deferral plus profit sharing (see below).o |
| two exceptions: | | | | Contributions are fully-tax deductible and are |
| 1. Exception that Price will decrease - sell now. | | | | based on compensation or earned income.o |
| 2. Own loosing stocks that can offset the gains.o | | | | Assets can be rolled from other plans or IRA's to |
| Converting regular income to long-term capital | | | | a Solo 401K. There is no limit on roll-overs.o The |
| gain - In general, gains from selling stocks you | | | | account holder can take a loan that is tax-free |
| hold for 12 months or more, are subject to a | | | | and penalty free from the Solo 401K, if allowed |
| 15% long-term capital gain while gains from selling | | | | by the plan, up to the lesser of 50% or $50,000 |
| stocks you hold less than 12 months are taxed | | | | of the account balance. |
| subject to your highest tax bracket. | | | | The contribution limits depend on how the |
| Accelerate expenses | | | | business is established. Overall, the total of |
| Cash-Basis-Tax-Payer will benefit from paying | | | | deferred salary and profit sharing that can be put |
| next year expenses before the end-of-the-year. | | | | in one of these accounts in one year is limited to |
| Those expenses which will be paid anyways will | | | | $40,000:o For businesses that are not |
| be deductible this year if paid before December | | | | incorporated, the salary deferral and the |
| 31.o Donation - if you are planning to donate cash | | | | profit-sharing contributions are based on net |
| or property, do it before December 31.o Property | | | | earned income. The maximum contribution limit is |
| taxes - pay next year real estate tax before the | | | | calculated based on salary (max deferral of |
| end of the year.o State taxes - pay your state | | | | $12,000) and profit sharing up to the current max |
| taxes on your capital gains and business income.o | | | | contribution. Contributions are not subject to |
| Medical expenses - do so only if your overall | | | | federal income tax, but remain subject to |
| medical expenses are over 7.5% of your | | | | self-employment taxes (SECA). The owner |
| Adjusted Gross Income, otherwise it is not | | | | receives a tax deduction for both salary deferral |
| deductible.o Employee's unreimbursed expenses - | | | | and employer contributions on IRS Form 1040 at |
| only if they are over 2% of your Adjusted Gross | | | | filing time.o For corporations, the maximum |
| Income otherwise it is not deductible. | | | | elective salary deferral amount for 2003 is 100% |
| Maximize tax creditso College / high education | | | | of pay up to $12,000 ($14,000 if age 50 or older). |
| tuition - Paying tuition for you or a dependant? | | | | The maximum employer contribution (profit |
| make the payment before the end of the year | | | | sharing) is 25% of pay, and is based on the W-2 |
| and benefit from a credit (note that the credit | | | | income. It is not subject to federal income tax or |
| has very strict income threshold which causes | | | | Social Security (FICA) taxes. The salary deferral |
| you to loose the credit)o Childcare credit - for | | | | contributions are withheld from your pay and are |
| two working parents (or students), you can get | | | | excluded from federal income tax but are subject |
| up to $480 per child. If you have flex plan to | | | | to FICA. The business receives a tax deduction |
| cover it - spend your unused "Flex" balance. | | | | for both salary deferral and employer |
| Retirement Planning | | | | contributions. |
| There are several retirement plans that allow self | | | | Keogh plan |
| employed and micro business owners to make | | | | A Keogh plan is a tax-deferred retirement savings |
| contributions and achieve both: | | | | plan for self-employed. In general self-employed |
| 1. Tax deductions to offset self employment or | | | | individual may contribute a maximum of $30,000 |
| business income | | | | to a Keogh plan each year, and deduct that |
| 2. Financial planning for the future | | | | amount from taxable income. |
| (SEP) IRA | | | | Profit Sharing Keogh |
| A simplified employee pension (SEP) IRA allows an | | | | Annual contributions are limited to 15% of |
| employer to make contributions toward his or her | | | | compensation, but can be changed to as low as |
| own (if self-employed) or employees' retirement. | | | | 0% for any year. |
| Employers can contribute a maximum of 25% of | | | | Money Purchase Keogh |
| an employee's eligible compensation or $42,000, | | | | Annual contributions are limited to 25% of |
| whichever is less. | | | | compensation but can be as low as 1%, but once |
| Self-employed's contribution is based on the net | | | | the contribution percentage has been set, it |
| profit from the business (self employment income | | | | cannot be changed for the life of the plan. |
| and not the gross income). | | | | Paired Keogh |
| Per IRS regulations employers must include all | | | | Combines profit sharing and money purchase |
| eligible employees who are at least age 21 and | | | | plans. Annual contributions limited to 25% but can |
| have been with a company for 3 years out of | | | | be as low as 3%. The part contributed to the |
| the immediately preceding 5 years. | | | | money purchase part is fixed for the life of the |
| For calendar year corporations with a March 15, | | | | plan, but the amount contributed to the profit |
| 2006 tax filing deadline, SEP-IRA contributions | | | | sharing part (still subject to the 15% limit) can |
| must be made by the employer by the due date | | | | change every year. |
| of the company's income tax return, including | | | | Taxes are due when the individual begins |
| extensions. | | | | withdrawing funds from the plan. Participants in |
| The contributions are deductible for tax year | | | | Keogh plans are subject to the same restrictions |
| 2005 as if the contributions had actually been | | | | on distribution as IRAs, namely distributions cannot |
| contributed within tax year 2005. | | | | be made without a penalty before age 59 1/2, |
| Sole proprietors have until April 15, 2006, or to | | | | and distributions must begin before age 70 1/2. |
| their extension deadline, to make their SEP-IRA | | | | Setting up a Keogh plan is significantly more |
| contribution if they want a 2005 tax deduction. | | | | involved then establishing an IRA or SEP-IRA. |
| Solo 401(k) | | | | |