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Just FYI - I'm a small business owner who's been using Solo 401ks for years, and there's a weird exception that might apply to your situation. If you're a sole proprietor, the "employee" contribution is technically coming from you as the owner anyway. Some providers will code these contributions differently in their system. I've seen cases where you can make the full contribution up to the tax filing deadline and just specify how much is employee vs employer when you file your taxes. But this varies by provider and how they report to the IRS.
That's interesting! So are you saying some providers might actually allow employee contributions after December 31st, or is it more about how they classify the contributions internally? Has this approach ever caused issues with the IRS for you?
It's more about how they classify contributions internally. The IRS rules are still the same (employee contributions by Dec 31, employer by tax filing deadline), but some providers don't track the distinction in their system - they just report the total contribution amount. This approach hasn't caused me problems, but it requires careful record-keeping on your end. You need to document what portion was intended as employee vs employer when you file your taxes. The risk is if you exceed your allowed contribution limits for either category. I always consult with my tax professional to ensure my allocations are correct before finalizing my tax return.
I wanted to point out something that hasn't been mentioned yet. The SECURE 2.0 Act made changes to retirement plans, but it did NOT change the fundamental deadlines we're discussing here. Employee deferrals (the money you contribute as an employee) still need to be elected and set aside by December 31st of the tax year. Employer contributions (the profit-sharing component) can still be made until your tax filing deadline including extensions. What the SECURE Act (the first one) changed was allowing people to ESTABLISH the plan until the tax filing deadline, whereas previously the plan had to be established by December 31st. But this didn't change the actual contribution deadlines for plans that were already established.
Thanks for clarifying this! A lot of people confuse the deadline for establishing the plan with the deadline for contributions. I learned this the hard way last year when I set up my Solo 401(k) in February for the previous tax year, thinking I could still make employee contributions. Expensive lesson!
One option nobody's mentioned yet is setting up a Charitable Remainder Trust if you're charitably inclined. You could put some or all of the settlement into a CRT, take a partial tax deduction now, receive income for life, and then have the remainder go to charity. I did this with a $420k settlement and it worked out great - reduced my immediate tax hit, created a steady income stream, and eventually will support causes I care about. You'd need to talk to an estate planning attorney to set it up properly though.
How much of a tax deduction did you actually get from doing this? And what percentage of the settlement amount do you receive as income each year? I'm trying to figure out if this makes financial sense.
My tax deduction was about 25% of the amount I put into the trust, so roughly $105,000, which I was able to use that year and carry forward some to future years since it exceeded my deduction limits. I receive about 5% of the trust value each year as income, which is around $21,000 annually. You can set different percentages based on your needs - anywhere from 5% to 50% technically, though most are in the 5-8% range. The payments can be fixed or variable depending on how you structure it. The key benefit was avoiding a massive tax hit in a single year while still having access to income from the full amount.
Has anyone used a Section 1031 exchange for settlement money? My brother-in-law mentioned it but I'm not sure it applies to legal settlements.
Unfortunately, Section 1031 exchanges only apply to business or investment real estate, not to settlements. Your brother-in-law is probably confusing it with other tax deferral strategies. For your settlement, you're better off looking at the options mentioned above like non-qualified assignments or potentially a charitable trust if that aligns with your goals. Section 1031 wouldn't be applicable to settlement funds.
Have you considered just using TurboTax or H&R Block software? They have specific sections for adjusting cost basis on stock sales. I did my own with about 15 stock sales last year and it wasn't that difficult. The software walks you through it and you can manually override the reported basis.
Just to add another data point - I paid $275 last year for almost the identical situation (3 W2s, some interest, and about 20 stock sales with basis issues). This was with a small local CPA firm, not a chain. Big chains like H&R Block would probably charge more. Location matters too - I'm in a low-cost Midwest city. If you're in SF or NYC, $300 is practically a steal.
Another option is to just increase the withholding at your main job to cover the additional income from the teaching gig. My accountant suggested this approach because it's simpler than dealing with multiple withholding adjustments.
I do this too! Way easier to just have my primary employer take out an extra $200 per paycheck than mess with the withholding on smaller jobs. Just calculate your expected additional tax from all side gigs, divide by the number of paychecks from your main job, and add that amount to your withholding.
Thanks for confirming this approach! It's worked really well for me. One thing to add - if you go this route, make sure you're not having too much withheld just because it's easier. I review my withholding about halfway through the year to make sure I'm on track.
I adjunct at a community college too! For my $500ish biweekly checks, I have them withhold $100 for federal taxes. My spouse and I are in the 22% bracket with our combined incomes, and this has worked out almost perfectly for the past two years. You could try a similar percentage. Just remember that teaching income stacks on top of your other income for tax bracket purposes, so it's getting taxed at your highest marginal rate. Don't make the mistake I made the first year where I only had 10% withheld because I thought that's what the bracket would be if it was my only job!
Emma Olsen
Honestly, just fire him and move on. I've been through three different CPAs in the last five years. The good ones are worth their weight in gold, but there are plenty of duds out there. Your review sounds totally fair - you're describing exactly what happened. Pro tip: for next tax season, ask potential CPAs specifically about their experience with crypto taxes. Many traditional CPAs are totally out of their depth with crypto but won't admit it until they've already taken your money. I found my current guy through a crypto subreddit recommendation, and he's been amazing with all my DeFi stuff.
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Kylo Ren
ā¢Thanks for the validation. I've already started asking around for recommendations for next year. Did you find any specific questions that helped you separate the knowledgeable CPAs from those just claiming to understand crypto?
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Emma Olsen
ā¢I ask them to explain how they handle specific crypto situations that I know are tricky - like liquidity pool rewards, token airdrops, or NFT transactions. The ones who give vague answers or just say "we can handle any crypto situation" without details are the ones to avoid. The good ones will be honest about what they know and don't know. My current CPA straight up told me he specialized in DeFi and mining operations but wasn't as familiar with NFTs. That honesty was refreshing, and he ended up partnering with an NFT tax specialist for that portion of my return. Transparency about their limitations is a huge green flag.
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Lucas Lindsey
Dude you were too nice. I would've refused to pay anything and given a 1-star review. He literally didn't do what you hired him for and then tried to charge you full price! I've noticed a lot of accountants think they can get away with garbage service because people are scared of doing taxes themselves.
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Sophie Duck
ā¢Eh, I disagree. The CPA did complete part of the work, so paying nothing would be unfair. The $250 partial payment makes sense. And honestly, most CPAs are overwhelmed during tax season - it sounds more like miscommunication than intentional deception.
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Austin Leonard
ā¢This is why I just do my own taxes now. I spent $600 on a CPA two years ago only to find a mistake that could have cost me $1200. H&R Block software is like $70 and has handled everything I've thrown at it including rental property and some basic stock trades.
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