1. Business deductions
With these deductions, the government helps pay for our business expenses. You could easily run a business out of your home and that small business would afford you the same tax benefits enjoyed by large businesses. For example, dinner with your spouse can be deductible. How can this be deductible? Anything can be a business deduction as long as it meets the following four criteria. First, it must have a business purpose, meaning you’re going to talk about your business. Second, it must be ordinary. This means it must be typical for you to talk about business and to talk about it with the person you’re going to talk about it with. This person could be your business partner, your spouse, or someone who has nothing to do with your business providing you with critical feedback. Third, it must be necessary, which means you need to incur the expense to benefit your business. Fourth, it must be documented and documented properly. Learn how to make your expenses deductible. There are ways to make any expense deductible, whether it’s your car, your house, your meals, your vacation, or your travel. And remember that if you want to change your tax, you have to change your facts.
2. Conversion
Depending on your situation, you might be able to convert your income from a type of income that is taxed at a higher rate to a type of income that is taxed at a lower rate. Remember, your salary may be taxed as high as 37%, whereas the most you can pay on dividends or capital gains is 20%. Let’s consider the 20% pass through deduction. How amazing it would be if you could reduce your taxes by 20% today! All you must do is go from being an employee to being self-employed in your business. You immediately get 20% off by converting your income from employment income to self-employment income by becoming a contractor or consultant to your company and receiving a 1099 instead of a W2. That’s money that goes back in your pocket immediately!
3.Kids
Kids have their own tax bracket, and it’s typically much lower than the tax bracket their parents are in. If you own your home-based business and you pay your child to do bookkeeping or marketing and you pay your kids $12,000 a year for this, that money is not taxable to your kids. That’s money back in your pocket. Take the opportunity to discuss this with your tax advisor and to determine what your children can do in your business. Even better, if you pay your kids from your own company, you don’t even have to pay social security taxes on that salary if they are under the age of 18. By employing your children and teaching them how to work and be self-reliant, the government is in essence giving you a $12,000 deduction, not taxing them, and not charging social security taxes on it. It’s much better to have the money in your pocket available today and to use it now instead of waiting and giving it to the government.
4. Tax credits
Credits are dollar for dollar reductions in your tax bill. So for instance, when you donate a dollar to charity, you will pay a dollar less in state taxes, up to a certain amount that is determined by your state. You also get a deduction for charity purposes from the federal government. In this way, being generous reduces your taxes. In addition to the tax credit for charitable giving, there are hundreds of other tax credits for doing other things the government wants you to do.
The benefits mentioned so far are permanent tax benefits, meaning you never have to pay this money back. Next is tax deferral, which is when you postpone paying tax.
5. Deferral
With IRAs, 401Ks, pension plans, and profit-sharing plans, you can defer paying taxes to a later date. Most financial planners and tax preparers will tell you to save on taxes by deferring it to a later year. This is the way to save on taxes once you’ve done everything else by following the other 4 ways for permanent tax benefits.
It's important to strive to retire with more money and to pay less in taxes. Understanding that there are 5 legal ways to save on taxes every day is extremely important, and it’s important to learn how to put money in your pocket right now. Spend time with your tax advisor and build a tax strategy to start taking advantage of this so you can have way more money and pay way less tax.
If you’re ready to see how we can help you reduce your taxes and increase your wealth, schedule a call with us today! The team at TFW Advisors® would be happy to help.