| If you don’t already own a business, start one.
Since the drastic changes made to the tax laws by the Tax Reform
Act of 1986, owning your own business has become the best tax shelter
available. This benefit is so important that many taxpayers establish
sideline businesses primarily for tax breaks.
I haven’t paid taxes in years - one of the reasons I
believe everyone should run a business.
Shirley A., magazine publisher, New Jersey
Smart Way # 1 - Fully deductible business expenses
For the self-employed, business expenses are deductible in full
directly from gross income. You can deduct any expenses that are
“ordinary and necessary” to run your business, even
if they benefit you personally.
Smart Way # 2 - Full home office write-off.
The rules allowing a taxpayer to claim the home office deduction
have been loosened, beginning January 1, 1999. No longer does
the home office need to be the “principal place of business”
for the taxpayer. The home office test can now be satisfied if
the taxpayer uses the home office for “administration or
management activities” and there is no other fixed location
in which the taxpayer performs such activities for his business.
The home office still must be used exclusively for business purposes
to qualify. This will allow more taxpayers who conduct business
outside their office but use their home to perform administrative
tasks to qualify for the home office deduction.
Smart Way # 3 - Writing off family medical expenses
This strategy is a little more complicated but is well worth
the extra effort. My family saved by deducting over $5,000 in
out-of-pocket medical expenses from my business income last year.
With two young kids, medical expenses can add up quickly.
To use this strategy, first, you must hire a spouse or other
trusted family member to work for your home or small business.
Either full-time or part-time status will work. Next, you need
to set up and sign a medical reimbursement plan. You may need
the advice of an accountant to help you with this. This plan allows
any sole proprietor to convert all family out-of-pocket medical
expenses into legitimate business deductions. Finally, your spouse
or family member pays all out-of-pocket medical expenses for the
family, keeping receipts and documenting miles driven for medical
purposes. At a specified time, your business reimburses your spouse
or family member for these expenses and deducts them as a business
expense.
Smart Way # 4 - Writing off your child's college
education expenses
If you frown at the high cost of college education, this tax
strategy is for you. If you put your child on the payroll of your
business for performing office chores and other business-related
tasks, you can pay each child up to $4,550 a year (in 2001) ($4,700
in year 2002), and that amount will be canceled out by the child's
own standard deduction. Your child can pay for or save for his
or her college education with the deductible wages you pay, and
there will be no payroll taxes for your child if he or she is
under age 18.
Smart Way # 5 - Deducting auto mileage to and from
your job
Do a few minutes of work for your home or small business before
you leave the house for your job and when you return to your house
after work. Document this activity (a few e-mail messages, letters,
or phone calls) each day in your day planner, journal, or other
permanent document, and also keep a written record of your mileage.
This allows you to deduct this mileage as miles between jobs (34.5
cents per mile for 2002).
Smart Way # 6 - Deducting vacation travel expenses
Try to combine business (a meeting with a client or possible
client, checking out some material or resources for your business,
etc.) with your vacation travel. As long as your trip is documented
in advance, showing an intent to build your business in some way,
your travel expenses become business expense deductions. Meals,
hotel rooms, plane tickets, car rentals, and even certain expenses
for entertainment are deductible as business expenses with proper
documentation.
Smart Way # 7 - Deducting phone, Internet service,
and utility bills
If phone calls, Internet service, or utilities are used for legitimate
business purposes, then, with proper documentation, they become
tax-deductible business expenses. If you have a credit or debit
card solely for your business -and you probably should -the annual
fees and interest payments are also tax-deductible business expenses.
Smart Way # 8 - Cutting your taxes when selling
appreciated assets
When you are planning to liquidate appreciated assets such as
stocks, think twice. Instead, give the actual stock asset to your
child or other trusted family member who has a lower tax bracket.
When that person sells the assets, he or she will pay taxes at
the lower tax rate.
Another excellent method is to donate your appreciated assets
to your favorite Islamic charitable organization. You are allowed
to deduct the full value of the assets as a charitable contribution,
and neither you nor the organization will pay any capital gains
taxes on the assets.
It would be advisable to consult a tax professional or accountant
for proper planning and documentation for some of the more complicated
tax strategies, but using these strategies could save you thousands
of dollars in taxes.
Smart Way # 9 - Tax deduction doubling
The important thing is to plan your tax strategy. For example,
if your tax deductions are usually not significantly higher than
the standard deduction, then take the itemized deductions one
year and your standard deductions in the following year. Why is
this a good idea? Simple. You can increase those itemized deductions
(e.g., taxes, contributions, losses, etc.) over which you exercise
some control by paying/contributing most of them in the deductible
tax year. Some people call this technique doubling up. Let's take
a closer look.
- In the deductible year, pay your year's charitable contribution
for the upcoming standard deduction year in December. This is
then added to your regular contribution for the deductible year.
- For those individuals who exercise control over when they
pay their school and property taxes, it is sometimes wise to
pay two years' taxes for the deductible tax year. Make sure
that the tax payments are made in the deductible year. Note
that people whose mortgage company pays taxes normally have
no such flexibility.
- For the deduction year, sell those stocks that have a loss
(owned at least a year and a day) because the government, in
effect, absorbs the part of your loss that is equal to your
tax bracket percentage times the amount of the loss. For example,
assume that your loss on stocks was $10,000 in a deductible
year and the tax bracket of your return was 33%; then, Uncle
Sam would pay $3,333 of the $10,000 loss. Also remember that
losses can offset gains (without a corresponding loss) by $3,000
in any one tax year. The $3,000 loss can be deducted from ordinary
taxable income.
- Donate clothing and any other deductible items in the same
deductible tax year.
- Schedule all elective surgery and, if possible, other medical
expenses, into the deductible tax year.
In general, then, for any deductible expense (taxes, contributions,
losses, etc.) over which a taxpayer exercises control, it is wise
to plan one's deductions so that they can be fully maximized.
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. If we can help, please call us at (732)
566-3660 or e-mail at salim@njtaxsavers.com
Do You Engage in Tax Planning
Year-Round?
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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