We're paying a boat load in taxes, need tips

[Russell]

Re: We're paying a boat load in taxes, need tips

It'd be even better to be profitable at your small business. The IRS starts to get suspicious when you have a small business producing consistent losses.

Yeah, I just don't see how writing off small expenses like cell phone etc will help here

To the other point regarding saving your money and loading up on payments at the end of the year: lots of Self-employed people do that as well. It makes perfect sense to me and the IRS sees it as "received in 20XX" - they don't break it out into quarters or anything.

Actually, I calculated it and the interest I'd earn on the money is really peanuts. To calculate it, it has to be amortized. So say I lower my withholdings starting today, then the interest earned on my next paycheck's savings would be now through the end of the year, then the following paycheck's savings would earn interst from next month until the end of the year. If I'm really 'saving' about $100 a week the interest earned at the end of the year would be something like less than $200 for the whole year and then I'd have to write uncle Sam a lump sum check of $5200 or something.

Still, searching for more ideas. Buying a house is in the plans, might take a couple of years to do though.

[cicy33]

Re: We're paying a boat load in taxes, need tips

I guess I don't consider a write off of about $700 a year small but then we are lower income people. our cell phone for my husband is about $60 a month and we write off every bit of it. And that is just one deduction that we use. We get to write off mileage which I believe is pretty high right now, if you have to buy special clothing, supplies, all of that can really add up. Look at it this way. You have to pay the government $1000 in taxes. Now, either you can spend the $1000 in a way that deductible and have something to show for it or you can hand it over. Every accountant I have met has always said make sure at the end of the year try to spend your excess cash to not show such a huge profit of taxable income. You cannot really get out of your taxes but you can spin it to your benefit. My husbands income this past year was somewhere around $28,000. By the time we took all deductions that we could his business profit was $900. (as said above show a profit) We went to a real accountant by the way. I don't do end of year taxes. It was a slow year but you get the idea. try everything you can to create a reason to write something off. If you do paperwork in your home for your business and you don't have a seperate office then you can deduct portions of your utility bills.

[jmjj215]

Re: We're paying a boat load in taxes, need tips

Every accountant I have met has always said make sure at the end of the year try to spend your excess cash to not show such a huge profit of taxable income.

This must also be followed by a caveat: If you weren't already going to spend it incurring an expense purely for the tax deduction makes absolutely no financial sense.

[cicy33]

Re: We're paying a boat load in taxes, need tips

This must also be followed by a caveat: If you weren't already going to spend it incurring an expense purely for the tax deduction makes absolutely no financial sense.

Actually that is wrong. If you make XXX profit and you are going to pay XX in taxes. But if you spend part of the profit then you are lowering your taxable which means less taxes. If you are going to have to pay the money for tax anyway, then why not use to get a piece of equipment that will be around and can be then depreciated each and every year thereafter? The money is going out no matter what. how it goes out is up to you. If we had not spent some of the money on equipment and misc stuff this past year we would have owed a ton of taxes too. but we used the money in a way that benefits us versus the government. Here is my analogy:

We make $28,000
We spend nothing
We own taxes on $28,000

versus

We make $28,000
We spend $26,000 in write offs, deductions, etc.
We pay taxes on $2,000

Major difference! and I have no idea what the actual taxes would be. This example is extreme there are always deductions that must be spent. But you get the idea. the more taxable income you show the more taxes you pay. I just prefer to keep my money for my benefit.

[Russell]

Re: We're paying a boat load in taxes, need tips

I guess I'm still having trouble understanding how you'll save money in the end because you're having to first spend the money on buying equipment, paying SE taxes, 100% FICA etc and then taking a deduction for the said equipment. So unless the business is really profitable (which most aren't and therefore fail within the first 2 yrs) and you're making a lot of money. Even then you'd have to do some kind of an incorporation where you pay yourself a salary because in sole proprietorship I don't see how you can shelter that money.

[cicy33]

Re: We're paying a boat load in taxes, need tips

for one, you only pay SE taxes on the taxable income. not the full amount. you don't actually make money, you simply move it around. As I said before, you cannot avoid taxes. What you can do is try to use the money to your advantage. all of your purchase no matter how small are deductible if you use them for business. most people have cell phones anyway, so that one is sort of a bonus! For my dh, he does siding and windows for a living. So does his dad and brother, so at xmas we all decided to purchase our own equipment and write it off. They would normally buy each other stuff like that anyway! Any time he buys a hammer, screwdriver, nails, anything no matter how small is deductible. Our mileage deduction is huge cuz he drives all the time. I think that in Illinois our is 41.5 per mile. Have to check on that. I think that the site says 39 but I think that is higher now. anyways, the key no matter what is to find deductions. all of them, lower your income. thus reducing your taxable income. We have insurance on the business, deductible, insurance on the vehicle, deductible, my mileage if used for business is also deductible, we also get a depreciation of his vehicle, and any equipment that we already owned from previous years, all deductible. a lot of the deductions are things that we buy anyway. That is why if they are experiencing high taxes on work income I suggested a small home business. I believe that you are allowed to show a negative for three years before they investigate. better to show a small profit though. But if you do not have a home business and you start one and it really does not effect your cash flow horribly you should have great deductions immediately. i.e. the house, utilities, vehicle mileage, etc.

[Russell]

Re: We're paying a boat load in taxes, need tips

Thanks again Cicy33 for taking the time to clarify and I agree with you that starting a home business is a great idea if you can make the business profitable and shelter money using SEP IRA and trusts etc.

Any time he buys a hammer, screwdriver, nails, anything no matter how small is deductible

Right, that's what I was saying, so for me if I start a business that will incur 'new' expenses which I don't have right now and then I can take a deduction for those 'new' expenses. In the end the best I'd be able to do is balance the new expenses with the deduction, it won't do anything to help with lowering the current taxable income.

But if you do not have a home business and you start one and it really does not effect your cash flow horribly you should have great deductions immediately. i.e. the house, utilities, vehicle mileage, etc.

I see your point there about being able to take the deductions on things like using part of your home/utilities/vehicle for your business but I don't think small deductions like these will do much to lower our taxable income by much specially since we don't own a house. I think what will help is buying a house and taking the mortgage interest and property taxes deductions.

[marjorie]

Re: We're paying a boat load in taxes, need tips

As far as investments go, long term capital gains are currently taxed lower than other types of income, just to add a little to the mix

[cicy33]

Re: We're paying a boat load in taxes, need tips

You don't have to own a home to take the deductions on your utilites and if you carry renters insurance. It also depends on what you do. I do office work, so paper, pens, ink, etc is all deductible and I usually buy that stuff anyhow. but yes, if you start a business and try to get it all going at once and it is something you are not even close to used to doing then the cost could get high.

BUT the point I am trying to make is that you are not going to be able to get away from taxes that you owe with your regular income. however, if you have tried all other options and cannot lower your taxable income any more and you still owe lets say $3000 for taxes, you are going to be paying that money to somewhere. I personally would rather spend the $3000 for a new business, write it off and owe the government nothing. does that make sense? I despise paying taxes. can you tell??? The money is going out no matter what you do. at least you can have something to show for it. Open an office oriented business, buy a computer, write it off. but a printer, write it off. then you have something to show for your efforts. These are just examples by the way.

[Russell]

Re: We're paying a boat load in taxes, need tips

Ah, ok I see your point now. Makes good sense and I'll look into it, I guess I was focusing on lowering the taxable income but sometimes you gotta think outside the box. Thanks.

[cicy33]

Re: We're paying a boat load in taxes, need tips

no problem, I have been there and done that! I just hope all works out.

[jmjj215]

Re: We're paying a boat load in taxes, need tips

a lot of the deductions are things that we buy anyway

That's the key though cicy, and my point above. You should not incur an expense purely for the deduction. It's a deduction - not a credit.

if you have tried all other options and cannot lower your taxable income any more and you still owe lets say $3000 for taxes, you are going to be paying that money to somewhere. I personally would rather spend the $3000 for a new business, write it off and owe the government nothing.

If you owe $3,000 in taxes, and your marginal tax rate is 25%, you would need to spend $12,000 to "save" $3,000 in taxes. So, instead of paying the government $3,000 you're paying a vendor $12,000. Now, if you already need that $12,000 equipment, then that makes sense, but if you're purchasing it just for the deduction you just made a decision that netted you -9,000.

Edit: the above example is assuming that equipment is immediately deductible, which it may not be, and in that regard, the decision would be even worse because of the lost value of the money over time. And then, when you sell the depreciated equipment, you have to recapture that deducted depreciation anyway - even worse.

Makes good sense and I'll look into it, I guess I was focusing on lowering the taxable income but sometimes you gotta think outside the box.

I'd be careful thinking so far outside the box that you start making business decisions purely for tax reasons. If the decision makes business sense first - regardless of tax consequences - then, and only then should you also bring tax deductions into the decision process.

[cicy33]

Re: We're paying a boat load in taxes, need tips

However, if you are not using deductions that are mileage and phone and are using them anyways, they are basically free deductions. other things yes you must be careful. We deduct 100% of all equipment purchased every year that costs under $1000. All else is depreciated including our vehicles. If you do not have to put much into your "new" business then you are not out much and it does not hurt you and can only help you. I run a bookkeeping business as well as clerical stuff. most of my stuff is normal daily stuff. my cell phone alone is $700 a year fully deductible at 100%.

[Russell]

Re: We're paying a boat load in taxes, need tips

OK that's what I was talking about earlier too but then Cicy said it in a way that it made sense After running the numbers you're right too.

So say I owe $3000 to the IRS, I take that $3000 and spend it on equipment for business so I can get a tax deduction:

$3000 x .25 = $750 (tax deduction)
Owe IRS $3000 - $750 = $2250
Final bill $2250 + $3000 (business expense) = $5250

now if you needed that $3k worth of equipment then great which is what cicy's doing with her business but just for a tax deduction the answer is no.

OK so I think we're all kind of saying the same thing with a little twist

[jmjj215]

Re: We're paying a boat load in taxes, need tips

However, if you are not using deductions that are mileage and phone and are using them anyways, they are basically free deductions. other things yes you must be careful. We deduct 100% of all equipment purchased every year that costs under $1000. All else is depreciated including our vehicles. If you do not have to put much into your "new" business then you are not out much and it does not hurt you and can only help you. I run a bookkeeping business as well as clerical stuff. most of my stuff is normal daily stuff. my cell phone alone is $700 a year fully deductible at 100%.

Yeah, we're all talking about the same thing