Tax Angle #6: Extract Tax Benefits From Gig Work

A series of strategies for tax-wise investors. Table of Contents.

Moonlighting yields some nice tax dodges. With side income you can:

—deduct things you couldn’t from a salary,

—grab a 20% “pass-through” freebie,

—stuff savings into a Roth account.

Say you and your spouse raise Yorkshire terriers. Income from that will go on a Schedule C for proprietors; there, you can deduct things like dog show expenses that would never be deductible from salary income. From what’s left after business expenses you can deduct half of what this sideline costs you in Social Security and Medicare taxes.

Next, if you don’t have health insurance from a day job, you get the self-employed health insurance deduction. This is a superdeduction. Superdeductions are valuable for two reasons. They can be claimed even by people who use the standard deduction, and they shrink adjusted gross income. AGI is used in all sorts of formulas to punish higher-income taxpayers.

There’s more from those canines. Let’s say you have $60,000 left after the dog shows, the half of the payroll taxes and the health insurance premiums. The 20% pass-through gives you a $12,000 deduction on your federal taxable income. That means you owe federal income tax on only $48,000.

That pass-through deduction for businesses that don’t pay the corporate income tax came with the 2017 Trump tax cut, and is set to expire at the end of 2025. Congress may hasten its demise, at least for big businesses. It’s less likely that legislators will crack down on self-employed plumbers and dog breeders.

With or without the pass-through deduction, you can use the $60,000 in our example to calculate permissible contributions to retirement. Set up what’s called a “solo 401(k)” plan. If neither you nor your spouse are making 401(k) contributions in your day jobs, and if you are both 50 or older, you can send $52,000 off to a tax-free Roth account.

For more information, see Rules For Wealth: 6 Self-Employment Tax Schemes.