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I do my own business taxes. I know, I know, I should delegate it out. But, in my defense, in order to delegate I would have to get all my receipts in order and all my financial records straight and by the time I do that, the taxes are basically done.
I have been doing taxes like this for all the years I have had a business and am now pretty good at it. I like going onto the IRS.gov website and doing research into tax issues just a bit, and keeping up on the latest small business deductions. Yes, I am a geek like that.
So I was finishing my taxes last week and it downed on me. If I want to pay less taxes I have a number of tax shelters:
Make less – why would I do that?
Give more to charity – true, but I would also like to keep more
Have more expenses I can write of as business expenses – true again, but I am actually working on spending less on running my business as an exercise in simplicity
Save more – hmmm, haven’t considered this before as a tax strategy.
Americans do not tend to save, and so for most people, saving as a way to pay less taxes doesn’t compute. At least it didn’t for me until I thought it through.
If you are a small business owner you can have your business retirement plan such as a keog, or a individual 401k, or a Simple. The money you save and put into these plans reduces how much money you owe in taxes on business profits. In addition as an individual, you can put money away in a traditional IRA, up to 5k a year to reduce you tax liability.
In other words, our taxation system rewards saving. I never thought about it like this before. On the other hand, carrying large consumer debt is penalized twice. First you pay high interest on it and second, sense you are paying on the debt and can’t save, you pay more in taxes.
I like using this software to work on my taxes, as I often put in different amounts for both deductions and savings to see how it affects my tax liability. This works best if you use it early on in the year, projecting your income and expenses and seeing how much you need to save (or spend) to minimize your tax liability.
What tax saving strategy do you use?
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