Extra “Credits” for a Solo 401k

Your contributions to your Solo 401k don’t just reduce your taxable income, they are make you eligible for extra tax credits and deductions.  Adjusted Gross Income (“AGI”) is often the input in determining whether you are eligible for tax credits and deductions.  Accordingly, the lower your AGI the more likely it is you will be eligible for these tax benefits.  A Solo 401k reduces your AGI, and it one of the largest potential items that can affect that number.  Let’s take a closer look at a real life example.


One of my clients, a single woman with three college-age children, is a solopreneur.  Since each child was in undergraduate studies each was eligible for the American Opportunity Tax Credit ($2,500 per child, $7,500 total).  The tax credit is available to single filers with an AGI of $80,000 or less, and a partial credit for filers up to $90,000 AGI.   Her AGI was $127,852, which would render her unable to use the tax credits.  After utilizing the Solo 401k strategy, she was able to contribute $49,676 to her retirement plan, and reduce her AGI to $78,176, thus making her eligible for the entire credit of $7,500.


Other Tax Credits and Deductions

The American Opportunity Tax Credit is just one example of a tax credit that can be realized that would otherwise be out of reach without the power of the Solo 401k.  Here is a list of some credits and deductions that can be influenced by this strategy, along with their phaseout levels for 2024.

  • American Opportunity Tax Credit (for first four years of higher education):
    • Single: $80,000 to $90,000 phaseout
    • Married: $160,000 to $180,000 phaseout
  • Lifetime Learning Credit (higher education not covered by AOTC)
    • Single: $80,000 to $90,000 phaseout
    • Married: $160,000 to $180,000 phaseout
  • Child Tax Credit:
    • Single: $200,000 to $220,000 phaseout
    • Married: $400,000 to $440,000 phaseout
  • Roth IRA eligibility:
    • Single: $146,000 to $161,000 phaseout
    • Married: $230,000 to $240,000 phaseout
  • Qualified Business Income deduction:
    • Single: $191,950 to $241,950 phaseout
    • Married: $383,900 to $483,900 phaseout
  • Medical expense deduction
    • Expenses in excess of 7.5% of AGI
  • Premium Tax Credit – depends on the size of your family


Whenever you can get from one side of the phaseout to the other using the Solo 401k then your contribution is partially paid for by the government.  What a deal!  Keep this these extra tax credits when deciding to use a Solo 401k!


Sherman Asset Management does not provide tax or legal advice.  The information contained herein is provided for informational purposes only.  Do not rely solely upon this information to make tax decisions.