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Deducting more from side-gig 1099 income vs investing more in i401K

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  • Deducting more from side-gig 1099 income vs investing more in i401K

    My main income if W2, but I have a couple 1099 side gigs. I do deduct home office from the side gigs and some other specific supplies, equipment, but there are some items that I could deduct elsewhere or choose not to deduct.
    I have an i401K and don't make enough 1099 income to come close to filling that bucket.
    So the question is, what is the math I have to consider wrt deducting from 1099 income (and reducing tax burden on that amount) vs having more to put into i401K?

    So if I am contemplating deducting a random expense of X cost:
    If I deduct it, I will save X*marginal tax rate (which I can then theoretically invest that same amount into my taxable bucket), right?
    If I don't deduct it, then there is some math involved that will allow me to deduct some factor of X as I can invest in i401K (and it's possible I could deduct it elsewhere for state tax advantage, but let's just pretend that's not an option for now).

    So which is theoretically more money, both now and in the future?

    I should add that none of this is much money (and my marginal tax rate is relatively low) so it's somewhat of an academic exercise really.

    Please kindly correct my thinking/math in any area, thank you.

  • #2
    I'd say deduct everything you (legally) can and put the savings in taxable.

    As you stated, the amount you can put in the 401k is going to be less than the amount you didn't deduct. So there will be a smaller deduction from the 401k than just deducting the entire amount. Furthermore, the advantage of putting money in a 401k is to defer paying taxes on that money but it is taxable eventually. Taxable account you will have to pay on the gains but the principal is already taxed.


    • #3
      You should take all legal business deductions. I don’t have a source but I believe this is actually required.

      this will reduce your net business profit and allowed employer contribution to your employer i401k, though ultimately as a result of the deduction you will likely come out ahead.

      invest the rest in taxable.


      • #4
        Rule of thumb- take every deduction you possibly can.


        • #5
          Lithium is correct. There is longstanding IRS guidance that a taxpayer is required to deduct the correct amount of expenses, and only the allowable expenses on their tax return. There is some wiggle room when it comes deductions requiring an affirmative defense (mileage, business use of a home, dual use equipment, etc...). While first applied to SE taxes/benefits and then earned income tax credit. It has been extended to any case where the taxpayer derives a tax/government benefit (retirement contributions, Medicaid/ACA, SNAP, etc...)

          Note: While receipts might be necessary for maximum deductions, obvious failure to have receipts can and have resulted in the IRS assessing default deductions and penalties. When it comes to the EITC, tax preparers are under strict due diligence requirements on over/under reporting of income/deductions. They can be subject to significant sanctions including suspension if they fail to do so.