For Small Business Owners, HR specialists, Self Employed, Professional Real Estate Investors
Offensive Tax Reduction is the act of taking the dollars you are already spending and making them tax deductible, morally legally and ethically, employing every legal device reasonable to reduce taxes on our earned income.The people that can best take advantage of this are self-employed people, HR specialists, small business owners or people who own enough real estate to be considered professional real estate investors. The first step is to think of taxes as your income that goes towards a negotiable bill.
We all have to pay a certain amount of taxes based on the income that we earn. To the extent a person can reduce their tax burden the result would be a higher net income, or “renegotiating their tax bill”. One example; a self-employed person can create ten to fifteen thousand dollars in new deductions required to create that $5,000.00 per year result, investing a few minutes a day and ZERO extra dollars.
Three Specific Techniques:
(1) Make the most of your vehicle deductions:
We all us a vehicle in our business, yet most people severally underutilizes this important deduction. The IRS gives us two methods to deduct our automobile, the IRS method, which is where you determine your business miles driven and deduct the amount they allocate per mile (around 56 cents at this time).
The second method is the actual method. The actual method is where you actually track your expenses, your gas and oil and such. I have done an unofficial survey of thousands of professionals over the years by asking the question in seminars I teach and around fifteen percent of the people use the Actual method, about seventy percent use the IRS method and about fifteen percent don’t know what method they use, if any. If there is a method referred to as the IRS method and a different method called anything other than the IRS method, which is generally better for you?
So why don’t you use the actual method? Too Complicated. Let’ take a look at two things, what you are giving up, and what complexity you are avoiding. The actual average cost to drive a mid size car is around 87 cents per mile, depending on the vehicle, IRS is offering 56 cents. If you averaged 87 cents per mile you would increase your deduction by 158%. In other words, if you currently drive fifteen thousand business miles, you deduct around $8,400 If you got 87 cents you would receive a deduction of $13,050.The additional $4,650.00 in deductions can be worth, depending on the tax bracket, between a $1,000 and $2,000 to you in additional net income.That is worth at least SOME complexity, lets see how much. The actual method consists of tracking your depreciation (which your accountant does, or you can use a depreciation table) your insurance (which you get reported to you annually), your interest if you have any, (which gets reported to you annually) major auto repairs (in your glove box) and all the rest; gas, oil, parking, car washes and wiper blades.
The only things you really have to track are the “rest” items. Sandy has what he calls the shoebox technique, take a shoebox, cut a whole in the lid, tape the top down, and put it in your car. Whenever you get a receipt, put it in the box (or the compartment in your car) and at the end of the year, have a cup of coffee and add up all the receipts. Over the course of the year you may have spent a total of a half hour, putting receipts in the box, another half hour gathering the insurance and bank info and putting them on a ledger and an hour adding up the receipts. That two-hour investment may create a $1,000.00 or more. Is it worth it? It nets out to 20 seconds a day! It requires a small change in habit: put receipt in box. There are a lot of other things that take a small amount of time that pay similar rewards.
(2) Hire Your Children:
Another excellent example of using the tax code to enhance your life as well as your wallet occurs when you hire your children (or grandchildren). When you hire your children you are not subject to FICA or unemployment compensation or the rest of those taxes, and your children are entitled to a certain amount of income (as are all Americans) tax-free every year. Right now the number is around $5,500 If you hire a child or grandchild they should be at least seven years old and need to not only be capable of, but actually doing work for your enterprise.
Depending on the business your in this could be easy or impossible at the age of seven, but there is precedent that says seven is old enough to be employed if you can demonstrate that the child works in the event of an audit. When you hire them there are several things that you have to do in order for it to be legitimate; you should write an employment plan so everyone understands the job description. You need to complete the proper paperwork, a W-4 and an I-9 and an end of year W-2 (your accountant or the IRS website has this information). You should pay regularly and by check. You should keep timecards, or have your child create and keep them as one of their responsibilities.
This will take dollars that would be taxed to you and shift them to a place where they are taxed to the child (tax-free). If you have no desire or ability to part with $5,500, giving it to your child, here is a strategy you can use that delivers multiple benefits. You can set up a custodial checking account at the bank where you can sign checks, or you and your child can sign checks, but your child cannot independently sign checks. From this account you can pay their cell phone, cable, Internet or school lunch bill, buy their clothes and pay for sports activities, even groceries can come out of that account. It is likely that you spend $5,500 per year on those types of things for them? One huge fringe benefit of setting this up is the kids can start learning finances. Your child will learn what it costs to go grocery shopping when they write a check every now and then. Balancing their checkbook could be one of their tasks and they will learn from that as well. The money to accumulate for college you have funded it with pre tax dollars, which is a good thing. If you use the pre tax cash to buy property for the child, you will compound the tax benefits for their current and future benefit.
(3) Transfer the Business Assets:
Owners of businesses that hold buildings or a substantial amount of equipment should consider transferring those assets from the company to themselves or one or more children and set up a leasing arrangement. This should cause you to avoid the surtax on gains plus the never ending Medicare tax on the rental income. If you are eventually transferring the business or it’s value to one or more children, you could transfer the assets to a partnership or specific type of trust to minimize income and estate taxes and to facilitate your succession plans. Talk to your accountant and see if this concept would work in your circumstances.
E. Rick Adams & R. Brook Hansen CLU, ChFC, AEP, CAP are a partners at Creative Wealth Srategies, a Registered Investment Advisor and have taught hundreds of offensive and defensive tax seminars for professional continuing education. 763-576-0501
WE are going to try to teach you three specific techniques in this text. Understand that like most things, in the end this is highly individualized planning and that every business and individual can use different techniques. I will also point out that I am not trying to substitute as a CPA here, all of the deductions you take must be supported, as your CPA/ accountant will tell you as you employ these techniques. It is dangerous to assume your accountant does “Creative Tax Planning” on your behalf.