9 Little Known Strategies That Could Legally Save You Thousands In Taxes
How to Lower Your Income Taxes
The rich are there to make all the money and pay none of the taxes. The middle classes are there to do all the work and pay all the taxes. The poor are there to scare the daylights out of the middle class so they’ll keep working and paying the taxes.
Income taxes are the single largest expense you’ll encounter in life, bigger then your home or the cost of getting your kids to college. Income taxes are the prevalent barrier to real financial security. You can never build any real wealth without first getting your tax life under control. You may have heard the expression “tax freedom day.” That’s the day when we stop working for the government and begin working for ourselves.
My experience in working with thousands of families indicates that most could substantially reduce the amount of income taxes they pay simply by adopting a sound tax reduction plan. There are legitimate ways to lessen your tax burden, which frees more of your money to be used for any purpose you choose.
The sad fact is that the IRS will never tell you about a tax deduction you didn’t claim. Discovering legitimate deductions is up to you. Every strategy that I have explained in this free report will reduce your taxes honestly, legitimately, and with the full approval and blessings of the IRS.
As you read this report you may recognize tax savings that you failed to claim when filing prior tax returns. Don’t worry. You can go back, amend prior tax returns, and claim a tax refund. Amended tax returns must be filed within three years from the date you filed your original return or within two years from the time you paid your tax, whichever is later.
Our tax system is indeed very complex, and tax laws are ever changing. The Internal Revenue Code, the Federal Tax authoritative guide, is a thick book with over 1.3 million words. Albert Einstein was quoted as saying “The hardest thing in the world to understand is the income tax.”
Generally, there are two principles in reducing your taxes:
- Make money you spend tax deductible as you spend it
- Use the power of retirement plans and investment tax shelters
Numerous strategies are identified within this chapter that you can use to substantially reduce your income taxes. It’s important to realize that tax planning is a year-round activity. With that mindset, you will rethink the day-to-day business and personal financial decisions you make relative to the tax liability they may create.
Tax Strategies vs. Tax Loopholes or Tax Cheating
In pursuing lower income taxes, it is never necessary to resort to tax cheating or tax loopholes, or even to question the legality of the tax system. There is a big difference between cheating, loopholes, and strategies. This report is not about “tax loopholes” or the “gray” (questionable) areas of tax law. It is not about tax tricks, “tax avoidance,” or “red flags” to get you audited. Tax strategies are positive, legal use of the tax laws to reduce your income taxes. Tax strategies are actions you can take that automatically and legally qualify you for additional deductions. These deductions are IRS-approved. And each and every one is money in your pocket. Some tax strategies are straightforward and obvious. Other tax strategies are just as legal, just as easy to use, but less well understood.
Strategy # 1 – Deduct your job-related auto expenses and/or charitable mileage
When you use your automobile at your employer’s request to run job assignments and your employer does not reimburse you, you may deduct 55 cents per mile (for the year 2009). If you are reimbursed less than 55 cents per mile, you can deduct the difference. If you have a second job, the mileage between the two jobs is also deductible.
Two methods are acceptable for deducting automobile mileage expenses. The first, and the easier of the two to use, is the Standard Mileage deduction. As described above, it allows you to deduct 55 cents per mile. The other method is the actual expense method, whereby you deduct the business portion of the automobile expenses such as insurance, gas, repairs, maintenance, and depreciation.
The automobile mileage deduction is taken on Form 2106. When reviewing past self- prepared tax returns, I come across many people who overlooked this deduction. Naturally, the IRS never lets them know of the missed tax savings.
You can also take deductions related to charitable gifts and volunteer work. You can deduct travel expenses incurred by traveling to charitable organizations for meetings, fund-raisers, or other events. You can deduct parking and toll fees, as well as bus, taxi, and other travel fares that are involved in doing your charitable work.
Strategy # 2 – Deduct your job-related education expenses
You can deduct the costs of qualifying education. This is education that meets at least one of the following two tests:
- The education is required by your employer or the law to keep your present salary, status, or job. The required education must serve a bona fide business purpose of your employer.
- The education maintains or improves skills needed in your present work.
However, even if the education meets one or both of the above tests, it is not qualifying education if it
Is needed to meet the minimum educational requirements of your present trade or business, or
- Is part of a program of study that will qualify you for a new trade or business.
- You can deduct the expenses for qualifying education even if the education could lead to a degree.
Deductible expenses. The following education-related expenses can be deducted.
- Tuition books, supplies, lab fees, and similar items.
- Certain transportation and travel costs.
- Other educational expenses, such as costs of research and typing when writing a paper as part of an educational program
Strategy # 3 – Deduct a home-based office when used for your employer
People who work for companies whose headquarters or branch offices are not located in the same city as the employee, or outside salespeople who often use their home office as a base, can often use these deductions. Even employees who do administrative paperwork in addition to their regular duties that require an outside office environment can use their expenses as a deduction.
There are rules that must be followed in these cases, however.
- The office in your home has to be your primary office – you can’t have another office at your employer’s regular business location.
- Your home office must be used to meet with customers, vendors, or patients.
- Your home office must be in an area of your home that is set aside regularly and exclusively for that purpose. The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job.
Strategy # 4 – Take deductions for capital losses
If you have capital gains on your investments, you can take any capital losses against those gains and pay no tax on your positive investment returns. Even if you have no capital gains from investments, you can still take up to $3,000 of capital losses against your ordinary income. The trick is in defining capital gains and losses. For instance,
money that you get back from an investment that is simply a return of your original principal does not qualify as a capital gain. You traditionally receive dividends that include return of principal from such investments as real estate investment trusts (REITs) or utility stock investments.
Strategy # 5 – Fund your retirement plans to the maximum
Retirement planning and estate planning tips
There are many ways you can reduce your tax liability through putting aside money for your retirement and planning wisely for the transfer of your estate. Investing in tax shelters can pay off handsomely in the long term. Within certain limits, you can deduct the contributions you and your wife make to IRA accounts. If you qualify for a Roth IRA, you can save a tremendous amount in taxes in your later years.
By investing in a Roth IRA, you are able to take advantage of the compounding effects of your investment returns on a tax-free basis. In addition, you do not have to pay any taxes on the money you withdraw after age 59½. You cannot deduct your contributions to this type of IRA, but, as you can see from the table below, you come out with a much greater advantage by allowing your returns to compound tax-free for the years to come.
The power of tax-deferred compounding
Assumes a 28% tax bracket, a constant 8% annual return, a $1,200 annual investment in the tax-deferred retirement plan (before taxes), and an $864 annual investment ($1,200 before taxes withheld) in the comparable taxable savings plan. This example reflects federal income taxes only. This illustration does not represent the performance of any particular investment. Your results may be more or less. Retirement assets will be taxed eventually (upon withdrawal), and there may be a 10% federal tax penalty for withdrawals made prior to age 59½.
There are limits to how much income you can make and still be able to contribute to a Roth. But if you are below those income thresholds, you should contribute as much as possible to your Roth. Even if your income begins to go beyond the threshold as you become more successful, you can put aside as much money as possible in a Roth while you still qualify. At least you will have the advantage for that pool of funds.
After your income goes beyond the threshold, there are other tax shelters you can use for your retirement. You can contribute to a 401(k) program, or you can take advantage of a defined benefit or defined contribution program your employer may have set up. Many employers have done away with their defined benefit and defined contribution plans as a result of the more popular 401(k) plans. This is because their liability is less with a 401(k) than with either of the other plans.
With a defined contribution plan, employers are bound to a specific percentage contribution of the company’s profits to the employees. If the company experiences a down year, it must find a way to make that contribution no matter what. In a defined benefit plan, the employer guarantees the benefits of the plan to you as an employee. That means that no matter what happens in the investment markets or the economy, your employer is bound to give you a specific amount of benefit for your retirement.
It’s easy to see why employers would choose a 401(k) over the other two plans. Many employers provide matching contributions to some degree to 401(k) contributions after you are “vested,” or after you have stayed with the company for a certain number of years. But you must be careful to find out whether you are allowed to make other investments than in the company’s stock. Many investors have lost their entire retirement nest eggs by having their 401(k) plans invested only in one thing – usually the company’s stock where they are employed.
Hopefully, investors will have learned from this mistake and will be more careful to diversify their investments both inside and outside of their 401(k) plans.
If you are an independent contractor or if you own your own company, you have a few other tax shelter choices. One of these is a Simplified Employee Pension plan, or aSEP plan. You can tuck away a significant portion of your income in these and other plans such as Keoghs, within certain limits. You can contribute up to 13 percent of your income in a SEP and other profit-sharing plans and up to 20 percent in Keogh and defined contribution plans. You can shelter a total of $30,000 per year in a mix of these types of plans.
If you are en entrepreneur, a doctor, lawyer, writer, entertainer, or other such entrepreneurial professional, more than likely you can set up one or more of these types of plans. If you have a partner, you can use a Keogh plan, but you must also establish pension plans for your employees.
Strategy # 6 – Gifting assets to your children
You can gradually take money out of your estate by giving it away. If your estate is larger than the normal exclusion amount, you can reduce its value by giving away $13,000 per year to each of your children, grandchildren, or anyone else without paying federal gift taxes. Your spouse can gift money as well, thus allowing a total $26,000 gifting capability between the two of you each year per recipient.
For very financially affluent individuals, these gifts are an excellent way to help with the educational needs of their grandchildren or to pass on their legacy without paying undue taxes. One note: if you use $13,000 worth of stock as your gift, give the stock shares away; do not sell the stock first and give the sale proceeds. Why? If you use the stock itself as the gift, you give a much more valuable gift to the recipient. He or she will have to pay taxes on the value of the gift at the time it was given, but the gift of stock can go on appreciating to much more than the original $13,000 value.
Or, if you are giving the gift to a child under age 14, you can give the stock, then let the child sell it under his or her tax rate instead of yours, which will be a much higher tax rate than the child’s. The best thing, though, is to give the stock and allow it to appreciate into a much more valuable long-term gift for the child. This will help make the most of the gifts you give for the child’s college education, especially if the child is very young and several years will before the money will be needed.
Strategy # 7 – Write-offs for children’s summer camp
Day camp costs are eligible for the child-care tax credit and employer-sponsored “flexible spending arrangements” (FSA). Many working parents who are sending their younger children to day camp this summer can count on the tax code to help subsidize part of the cost.
For children under age 13, the cost of day camp is eligible for the child and dependent care tax credit. Sending a child to day camp is also an eligible expense for employees who are paying child-care expenses through flexible spending arrangements at work.
Only day camp costs count. The cost of sending a child to sleepover camp isn’t eligible for either the child tax credit or payment through flexible-spending accounts.
The child- and dependent-care credit covers expenses for the care of children under age 13 (or an incapacitated dependent of any age) while the parents are at work. Generally, the credit applies to expenses of up to $3,000 a year for the care of one child and up to $4,800 for two or more dependents.
FSAs also provide tax savings. Any salary set aside in an FSA to pay eligible dependent-care expenses is exempt from income tax and Social Security tax.
Strategy # 8 – Choose an aggressive and knowledgeable tax preparer or none at all
Whether you use a tax preparer is strictly a matter of choice. Almost 65 percent of taxpayers use a tax preparer, and with the complexity of the new tax laws, more and more help will be needed. A good tax preparer is hard to find. He or she is an aggressive tax preparer who is up-to-date on all the new tax laws and their interpretation. Such a tax preparer can help you rethink your tax situation in light of the new tax laws, guide you through financial transactions, and, most importantly, inform you of new tax-saving opportunities and alert you to dangerous tax traps.
Strategy # 9 – Filing amended tax returns
Finding hidden treasures in prior years’ returns is a very exciting process. Most taxpayers are afraid that they’ll trigger an audit if they file an amended return. This fear, which is common and understandable, prevents many taxpayers from getting refunds they are entitled to.
The truth about amended returns is that they are not an automatic invitation to an audit Very few, in fact, are ever audited. Many types of amendments are processed routinely.
Some amendments are safer than others. The audit rate for amended returns, while higher then that regular returns, is still quite low. You can minimize the risk of an audit by sending back-up documents with your 1040X (the form used for making amendments).
Make note that when you amend your federal tax return, your state tax liability from that year may be affected, too. It could lead to an even bigger tax refund.
Do You Engage in Tax Planning Year-Round?
Many people worry about their taxes only during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern.
Can you make some changes to turn your hobby into a moneymaking business? Can you use that extra room in your house as a home office for your business? Can you arrange to use your car more for business purposes, and have you documented your business use mileage? Can you arrange for more of your entertainment expenses to be business related? Have you listed the business purpose on each receipt?
Do you make business and personal purchases, investments, and other expenditures with tax savings in mind? Do you document your expenses well so that they would survive a tax audit? Whenever you are faced with a business or personal financial decision, do you consider the tax consequences?
Make year-round tax planning part of your business management mindset and thus enjoy maximum tax savings. By rearranging your affairs to account for tax implications, you will save a fortune in taxes. Call us at (405) 285-7701 if we can help or visit us on the web at www.mycpateam.com
My final word of tax advice
Changes in tax laws in this country are ongoing. Enjoy the potential tax savings through implementing some of the tax breaks and strategies that I have identified in this report while these breaks exist. Don’t miss the boat (yacht)!!!
“Of course, lower taxes were promised, but that has been promised by every president since Washington crossed the Delaware in a rowboat. But taxes have gotten bigger and their boats have gotten larger until now the president crosses the Delaware in his private yacht.”
Will Rogers, 1928
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Edmond OK 73013
Telephone: (405) 285-7701