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3 Tax Breaks the Big Guys Use

High-income earners bank significant savings off these tax breaks, but the 'little guy' can, too.

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Tax Deferrals

Most Americans have access to some form of retirement plan, be it a 401k, a 403k or a 457 plan. In 2013 and 2014, the contribution limits on these sorts of plans is $17,500, or $23,000 for employees aged 50 or older.

Yet self-employed taxpayers — and most wealthy taxpayers fall into that category — can contribute significantly more. The contribution limits on two popular options — SEP-IRAs and Solo 401ks — are $51,000 in 2013 and $52,000 in 2014.

Is this something that an ordinary American can take advantage of? If you have any kind of side business or part-time contract work in addition to your regular W-2 day job, then yes.

But you have to make sure you utilize the right retirement plan option. At high income levels, SEP IRAs and Solo 401k plans offer identical tax savings. But at incomes lower than $204,000, there is a big difference. In a Solo 401k plan, you can contribute the first $51,000 you earned last year. Whereas with an SEP, your contribution is based on a formula: 25% of your compensation up to $51,000.

So, in a hypothetical case in which your side business earned exactly $51,000 in 2013, you could defer taxes on the total amount using a Solo 401k plan, but only $12,750 using an SEP IRA.

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