What are the tax strategies of the rich? What “loopholes” do they use to pay less in taxes? Can I use the same strategies and pay less in taxes?
These are common questions we receive here at the Investor Advisory Network (IAN).
We have been pumping out powerful tax strategies over the past couple months and have received some great feedback. We wanted to bring it all together into an example of how applying these simple 5 strategies can reduce taxes by over $16,000.
For each of these strategies, we provide hyperlinks back to the actual article so you will be able to get to the details. We encourage you to take these items to your tax professional to see how best you can apply them to your individual situation.
As a entrepreneur, you are both an employee and business owner. The strategy is simply to pay yourself a “fair” salary and take the rest as a distribution. You will save 15.3% on the amount distributed to you since it does NOT incur self-employment taxes. Self-employment taxes include 12.4% for social security and 2.9% for Medicare.
Here’s a simple break-down of moving from a $100,000 salary to a $50,000 salary + $50,000 in distributions:
EST. TOTAL SAVINGS: $6,579
Hiring 2 of your children at $6,350 each will enable you to take $12,700 from your higher tax bracket (let’s assume 25%) and move it their tax bracket (which is 0% at $6,350 each). That provides a savings of $3,175 ($12,700 X 25%).
Additionally, the first $6,350 (for 2017) of the child’s income is not subject to federal taxes – so they basically receive tax-free income (assuming no other income).
Our article on this topic covers a lot of the details that must be considered and documented to ensure it is valid and appropriate. We also provided some great freebies that make it easier to implement, including:
- Quick Start Guide (provides strategies on how best to use their income)
- Employment Agreement Template (a template to help you formalize their employment)
Simply go to our article “How To Hire Your Children and the Best Way to Do It” and get the details.
EST. TOTAL SAVINGS (2 children): $3,175
It’s amazing to me that some accountants still see this as a “red flag” for an audit.
The IRS has a lot of guidance on their website on how to get these deductions and in fact, have even come out with their “Simplified Model” that can be used. So, don’t be scared to use this deduction – just learn how to maximize it.
Yes, the IRS’ Simplified Model is simple, but doesn’t typically offer the highest deductions. There are 2 other methods for determining the amount of deduction you can use.
One method that is not well known of, but typically has offers the best deduction is the Rental Method. This is similar to the standard home office deduction that you may be using now, but has the additional benefit of moving the deduction to an “above the line deduction” (itemized deduction on Schedule E) which has less limitations. Talk to your tax professional for more details on this and how it benefits your unique situation.
We go into a lot of detail on each of these methods in our blog titled “3 Easy Methods for Home Office Deduction – What’s the Best for You?”
We also provided 2 great freebies to help, including:
- Home Office Deduction Calculator (an Excel spreadsheet that determines the best strategy for you)
- Lease Agreement Template ( template to help you formalize the lease between you and your company)
So how much can I save?
Well, you actually get two deductions with the rental method that add up to a nice tax savings.
First, you can also deduct the home office expenses or more accurately called “Indirect Business Expenses”. These are expenses that are related to running your home, but needed for the office also. Examples include mortgage or rent, home owners/rental insurance, property taxes, utilities, security systems and repairs and maintenance that are specific to the office space or entire home.
At the end of the year, you add up all of these expenses and take the appropriate percentage of these as your home office deduction.
As an example, if the total expenses were $20,320 and the office’s square foot was 10% of the entire home, the total deduction would be $2,032 ($20,320 X 10%). With a 25% tax rate, the savings would be $508.
Download our free Home Office Calculator if you want to see what your savings would be.
Secondly, the rent paid for by the company is an expense and as such does not require the 12.4% tax for social security or the 2.9% tax for Medicare (similar to a distribution). While this could add several $ thousands more in tax savings, we are not taking credit for it here since it could also be included in your savings from using Strategy #1 (Distributions).
EST. TOTAL SAVINGS: $508
Deducting auto expenses are simple, but are you using the best method? Are you leaving money “on the table”?
You can deduct business miles (Standard Mileage method) or the expenses incurred (Actual Expenses method).
We discuss the pros and cons of each method in our blog article titled: “Standard Mileage vs Actual Expenses: Get the Biggest Tax Deduction“.
Both methods offer a nice deduction, however, you need to put your information into our AUTO EXPENSE CALCULATOR before guessing which one will save you the most money. We have a link to download the calculator in the article.
After our investigations, discussions with some great CPAs and analyzing test data with the calculator, we came up with 3 rules of thumb:
- Use the Standard Mileage method if you have a car and are going to keep it for more than 2 years
- Use the Actual Expenses method if you sell/trade your car in every 2 years or buy a large truck/SUV exceeding 6,000 pounds.
- Only lease a car if using the Actual Expenses method and have low mileage.
BONUS: Once you applied the home office tax-savings strategy (Strategy #3 above), you can begin to deduct trips to any business destination, supply store, meeting with clients or business-related events.
EST. TOTAL SAVINGS: $5,350 (assuming using the mileage method with 10,000 miles/yr. @ $0.535/mile rate)
Common deductible expenses include airfares, meals, lodging, rental car, gas/tolls and incidental expenses if they are not lavish or extravagant.
Events, movies, plays, golf, sporting events and others are deductible IF the primary reason is for business. If it is not related to business, you can still enjoy them – it’s just on your dime (not deductible).
Check out our article “Discover How To Make Your Vacation A Business Travel Expense”. We cover the rules, general points to follow and present an example of how you can maximize your deductions on your trip. We also cover travel with unique rules such as conventions, seminars, cruise ships and foreign travel.
How much can this really reduce your taxes?
Let’s look at the potential cost savings with a simple, long weekend trip. You and your spouse take a flight on Thursday and return the following Tuesday. Here’s how to make the entire trip a business expense:
- The primary reason for the trip must be related to your trade or business.
- Your spouse’s travel can be expensed if he/she is a legitimate employee within the business.
- The days of travel can be expensed (Thursday and Tuesday).
- The majority of time spent on Friday and Monday must be related to your trade or business (> 50%). This will ensure these 2 days count as business and can be expensed.
- Since you have legitimate business on Friday and Monday, you can expense all non-lavish or extravagant expenses during the weekend.
If you meet all of these requirements, the entire trip can be expensed as business travel. With flights, hotel, meals and other expenses, let’s estimate the cost of the trip to be $4,000. With a 25% tax bracket, your direct savings would be $1,000 ($4,000 X 25%).
EST. TOTAL SAVINGS: $1,000
Tax Strategies Summary
By using these 5 simple strategies, we have shown a tax savings of $16,612
– and that’s EACH AND EVERY YEAR with no extra effort!
Additionally, this article only illustrates 5 strategies. There are a whole lot more strategies out there waiting for you to learn and apply.
So, what can you do with the extra $16K?
You can invest it back into your business or perhaps in an investment like real estate. $16K would be a 20% deposit on a $80K property. It’s like Uncle Sam is making the down deposit for you.
Can you imagine having Uncle Sam buy you a new rental property each and every year – all due to the tax savings you received at no additional cost to you?Apply our tax strategies & save enough for a down deposit on a rental property - each year! Click To Tweet
We have a lot more tax & wealth strategies to share with you. Our future articles will cover topics such as:
- Self-directed IRA/401K
- Self-directed HSA (Yep – this is possible!)
- Insurance Vehicles
- Use of Good Debt
- And much more…