Lower Your Taxes While Increasing Your Income
Lower Your Taxes. Increase Your Income.
Taxes are possibly one of the largest expenses you have. It’s important that you do everything you can to lower your taxes. After all, it’s free money. You’ve already earned it.
Trying to become financially fit on a diet high in taxes is like trying to become physically fit on a diet high in sugar. You will never become financially fit until you learn to control and minimize your taxes. Yet many don’t fully comprehend how much of a tax burden they carry.
Over the years I’ve asked many clients the question, “How much tax did you end up paying last year?” You’d be surprised how many of them answer something like, “I got a refund!” They act as if getting a refund means they didn’t have to pay any tax. I respond by saying, “That simply tells me that you paid more throughout the year than was necessary. But how much of your money did the government keep that they didn’t send you as a refund?” As they think about the question, often I see the light come on and they realize they don’t know the answer. Once the light comes on for you, you’ve discovered the opportunity to lower your taxes and increase your income.
Did you know that as an employee, you can end up paying between 17.65% to 47.25% of your hard-earned income to the Federal government alone (depending on your income)?
After adding state income tax, some taxpayers find themselves paying 50% or more of their hard earned income to taxes!
Of course we also pay property tax on our cars and homes plus sales tax, use tax and excise tax on things such as gasoline, tobacco, alcohol and highway usage. By the time you add import, estate, inheritance and other taxes, each of us have a massive tax bill! In fact some are paying as much, if not more in taxes, as they are for their clothing, food and transportation combined!
One thing is certain; almost all of us would like to reduce our tax burden. To do that, it’s essential we understand how we are being taxed. The purpose of this article is to highlight one especially simple approach that will help you keep more of your hard-earned money by lowering your taxes.
Did you know that there are actually two systems of income taxation? We have one system for the employed, and another for the self-employed.
Employee income is reported through IRS form W-2. Taxes on W-2 income are calculated and automatically withheld from your paycheck before you are paid. At the end of the year, employees file the standard 1040 tax form along with IRS form “Schedule A” which allows for certain tax deductions called “itemized” deductions.
Self-employed individuals use IRS form “Schedule C” to deduct business expenses, in addition to claiming the common deductions available through Schedule A.
Many ordinary expenses that cannot be deducted on Schedule A are deductible on Schedule C. By taking advantage of all the business expense deductions available through Schedule C the self-employed can reduce their tax bill by up to 50%. Therefore, if you are not currently self-employed, you can clearly see that a simple step to reducing your income tax is to become self-employed. To the extent that you take advantage of this powerful strategy, you could be deducting substantial expenses each year!
With proper documentation, it’s possible to turn vacations into tax-deductible business trips, write off car and home expenses, and even deduct some of your food and entertainment expenses.
If your business produces a “tax loss”, you can use that loss against any other form of income you have. In fact, if you file a joint return, you can also use the tax loss against your spouse’s earnings. If the tax loss exceeds all of your income for the current year, you can either carry back the loss to obtain a refund on income taxes paid the previous two years, or you can carry the loss forward to use against the next 20 years of income.
Lower Your Taxes. Start a Business.
To lower your taxes by the greatest amount possible, it is essential that you think outside of the W-2 box! I’m not suggesting you quit your job… but rather, while working as an employee, you start a part-time, home-based business and take advantage of the many tax deductions available. Doing so could potentially add 1,000’s of dollars to your Focus Fund every year.
Make the decision now to start a part-time, home based business. The options are endless:
- If you have acquired a high level of expertise in a trade or profession that is in high demand, you could become a consultant or an independent sales representative in your area of expertise.
- You could market many talents or skills you have developed. .
- Many hobbies can be turned into a business with a little thought and creativity.
- You can always become an independent distributor or sales consultant for a direct selling organization
- You can also market products, services, or information online.
- With the advent of Uber and Lyft you can easily become an independent “Taxi Driver” without much effort.
- Many individuals buy and sell real estate part time, while others simply work as a part time real estate agent.
By simply looking for unmet needs in the marketplace, you’ll be amazed at the ideas you’ll come up with. “Necessity is the mother of invention.” Can you think of any product or service that you want which is currently not available?
Network with others. Do you have friends or family members who have thought of a product or service they want that is currently not available? Observe and Listen. You don’t have to “reinvent the wheel”- just improve it.
Do you see any improvements that can be made with existing products or services? Pay attention to growth industries such as information, communications, legal, finance, medical, travel, education, health and wellness etc. What are the latest trends and developments in these areas?
Do you have a friend, relative or contact who is successful in business outside of your location that wouldn’t consider you to be a threat or competition and would therefore be willing to partner with or mentor you in starting a similar business in your market?
Do you know someone who is at the top of your field of interest and is accessible by phone that would be willing to mentor you?
Do you have a particular interest in a technical field or business but don’t have the technical training or experience to get started? Start researching online. Read blogs, participate in forums, watch videos and enroll in online classes. Read books listen to podcasts and attend seminars and webinars on the subject you are interested in learning.
Do you know of a company that you admire most that you would like to use as a model for your company or business?
Do you know of someone who is ready to retire from a business in which you have an interest? Some business owners who are eager to retire may be willing to finance the sale of their business for the right buyer.
Do you know of someone whose business holdings are becoming too spread out? They may be willing to sell a division in order to simplify and they may be willing to carry a contract.
Do you know of someone who hasn’t considered retiring but is tired and burned out? They may be willing to consider selling if the right party presented them an exit strategy.
If you put your mind to it, you’ll find that the options to start your own business are endless.
If you already have a business, have you ever found yourself holding back on taking deductions because you were worried about triggering an IRS audit or you felt guilty because it was an activity you would have paid for whether you were in business or not? Have you bought into the false belief that you can only deduct expenses up to the amount of income you earn from your business?
If so, I challenge you to cast aside your fear and false beliefs and make the mental shifts that will allow you to claim the deductions to which you are legally and ethically entitled.
Many successful people make the mistake of doing their taxes on their own. It’s the problem with having a good education and being American. Many of use think we can figure it out alone. Consider this; would you give yourself an appendectomy? NOOOOO! So why are you doing your own taxes? It is a tax professional’s job to lower your taxes! It’s worth it. Now, that’s no excuse to turn your brain off. Even tax professionals make mistakes, so stay on top of your finances and record keeping. It’s helps to ensure that you will lower your taxes by the maximum amount and consequently increast your income!
In closing, make sure you continue to educate yourself on how to lower your taxes. The money you’ve already made is easy money. Make sure you keep as much of it as you can to help you build the wealth that you desire.