How to Pay Less Taxes and Keep Much More of What You Earn, Legally.
by Nirjara Rustom
Everybody loves to earn more money, but few really know how to keep most of it! With some good information, there are ways to legally reduce your tax burden within the system. I’m not telling you to cheat on your taxes – don’t ever do that. It could land you in jail. But why pay 40-60% taxes if you can get away with maybe 5%? I know that this doesn’t sound possible, when federal taxes are around 30%, state taxes are around 10%, and Social Security is 15% (7.5% if you’re employed by someone else). But it really is, and it is your constitutional right to minimize your tax burden, within the law.
Right now, you’re paying into a system which you know will become defunct at some point of time. In fact, it may not be around when you most need it. So don’t depend on the government or social security to protect you, plan your own retirement and saving.
How do you do this? First of all, your business should be some type of corporation. This allows you to protect your business and assets. Next, you should start with writing off as many deductions as you are allowed to. This includes but is not limited to: Travel Expenses, Advertising and internet expenses including domain registration, designing and hosting, office furniture, events and seminars, educational books and tapes, coaching programs, health care, and much more. You then pay tax only on the balance income. For example, your income is $200,000. Your deductions total to $120,000. So your taxable income is only $80,000. Some folks will pay tax on the whole $200,000 without claiming deductions!
Some tax saving examples:
I have observed that Sections 105 and 106 of the tax code actually permit you to write off your entire health care (as of writing this), and not just your deductibles and co-pays. This means that you can claim your dental expenses, contact lens / glasses, etc, which most accountants will not favor. And you can’t even blame them – they specialize in “tax returns” and not “tax savings”.
Section 274 allows deductions for office equipment and supplies and even lunch and dinner expenses. So if you’re discussing business over lunch, you can claim deductions for it. But if you’re just having dinner with your family or friends, you cannot. So be careful for what you claim! In fact, section 119 allows you to write off 100% food and lodging expenses when you're traveling for consultation, seminars, etc. Don't stop at these two, claim deductions for your flight tickets also (section 162 allows this). If you wish to give additional health advantages to your employees, you can also have a gym and claim deductions for the entire equipment. However, gym memberships are not deductible, so be very careful and get the facts clear before you claim stuff left right and center!
The law also requires you to update your corporate documents each year. So you can combine your annual meeting with a vacation and make the entire trip deductible! You an even take your family with you and throw those expenses in. You can also three separate achievement awards per annum, up to $1600 in kind (cash not allowed). This can be a plasma TV, a refrigerator, anything but cash. You can even gift yourself!
Child care: Section 129 allows deductions of $5250 per child, per annum. It also allows claims for aged parents who need medical help. You can also create a scholarship fund for your kids and pay for their dance and karate classes, sports coaching, and other programs. This is covered in detail under section 127.
The Corporation Advantage: While you can still use most of the tax saving strategies without making a corporation, it does not give enough protection to your business and assets. An s-corporation allows 75 types of deductions, while a c-corporation allows as much as 300. A c-corp also has a lower tax rate.
Braving the audit: When you claim a lot of deductions, it's quite possible that the IRS may want to audit your books. Don't be afraid of them; they can't touch you if you keep all your records clean and up-to-date. I would advice you to maintain a tax log with your receipts and keep everything organized. This way, you won't have to search through piles of papers and receipts every time the IRS needs something.
Asset and business security: While s-corp and c-corp are great for tax savings, they don't really protect your assets. A proprietorship is not secure at all. One lawsuit can take away everything from you, including your business, profits, assets, house, office, etc. A partnership is even more riskier - you can be sued for mistakes made by your partners even if there's no involvement from you! So if you seriously want to protect your assets and business, I would suggest you to go for a limited liability corporation, like an LLC. It protects you from attorneys wanting to attack your business or assets.
Nirjara Rustom moderates the Legal Matters of http://www.bharatbhasha.com at http://www.bharatbhasha.com/legal.php