Tag Archives: BUSINESS

What is the Best Way to Reduce Your Federal Income Tax?

As a CERTIFIED FINANCIAL PLANNER™ , this is a subject that I get asked frequently. There is no one best answer to this question, however there are a number of places you can look to take advantage of tax breaks the government makes available. My first suggestion is “don’t let the tax dog wag the lifestyle tail”.logo-irs.gif

Before You Start:

  • Review your “life plan”

Starting a business is one of the best ways to avoid (not evade) taxes if there is something that you have a genuine passion for. Starting a business is a major undertaking, however if you have interests in certain areas, think along the lines of how you could make a career of it . If you like photography, start a photography business. Fishing, how about a charter? Following your own interests will be your best guide as to the type of business you create.

As an individual, you might say that you earn money, pay taxes, and live on what’s left. A business earns money, takes deductions, then pays taxes on what’s left. Big distinction! The type of business (S corp, C corp, etc.) will dictate the specifics on business tax deductions.

In addition to deductions for running the business, you might be entitled to establish a retirement plan or pension plan for your business. Retirement plans are deducted from your income and are a deduction for the business. Depending on what type of plan you establish, contribution limits for retirement plans range from $44k to almost $200k per year! Deductions for retirement plan contributions could provide a major source of tax savings and be a good step toward securing a better retirement nest egg for yourself.

If starting a business isn’t your cup of tea,  home mortgage interest allows for a hefty deduction. Currently the government allows homeowners to deduct “qualified residence interest” of up to $1,000,000 of “acquisition debt” and up to $100,000 of home equity debt.

The Alternativee Minimum Tax (AMT) has been affecting average taxpayers more and more over the years.  The AMT can severely limit your ability to take certain kinds of deductions and it is important to work with a qualified tax professional or financial planner who can advise you on your individual situation before you implement a new strategy.

Opportunity abounds for people to save money on taxes. The right strategy will depend on your goals, opportunities, and stage of life.

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